Showing posts with label Income-Based Repayment plans. Show all posts
Showing posts with label Income-Based Repayment plans. Show all posts

Friday, April 2, 2021

President Biden ponders $50,000 student-loan cancelation: That doesn't go nearly far enough

 President Biden has asked Education Secretary Miguel Cardona to prepare a memo on the president's legal authority to cancel up to $50,000 in student debt.  

If he did that, the experts tell us, President Biden would forgive all college-loan debt for 36 million people--about 80 percent of all borrowers. 

Is that a good idea? 

Sort of. Anything the federal government does to provide relief to distressed student-loan debtors is good, so I support a massive cancelation of student debt.

Nevertheless, one-time debt forgiveness is the wrong approach. 

Wiping out student debt without reforming the student-loan program is like fixing a flat tire on a broken-down car and then putting it back on the highway with no brakes. Someone down the road is going to get hurt.

The whole damned, rotten student-loan system has to be torn down. Otherwise, the corrupt, venal, and incompetent American higher education system will continue ripping off the American people.

Obviously, massive reform can't be accomplished overnight.  But here is what we need to do for starters:

1) Congress must remove the "undue hardship" clause from the Bankruptcy Code and allow insolvent student-loan debtors to discharge their loans in bankruptcy. 

2) We've got to shut down the Parent Plus program.

3) The federal government has got to stop subsidizing the for-profit colleges, which have hurt so many young people--especially people of color and low-income people.

4) We've got to stop shoving student borrowers into 25-year, income-based repayment plans that are structured such that no one in these plans can ever pay off their loans.  There almost 9 million people in IBRPs now. 

5) The universities have got to start offering programs that help their graduates get a real job. Degrees in ethnic studies, diversity studies, LGBT studies, and gender studies only prepare people for jobs teaching ethnic studies, diversity studies, gender studies, and LGBT studies.

6) Finally, we must restore the integrity of the nation's law schools.  We've got too many mediocre law schools. California alone has more than 50 law schools, with only 18 accredited by the American Bar Association.   And the law schools need to go back to admitting students based on objective criteria--the LSAT score, in particular.

If we had fewer but better-trained lawyers, we'd have less litigation and fewer attorneys who see their job as being hired political hacks.

Will the Biden administration do any of the things I've outlined? I doubt it.

Higher education is in desperate need of reform. A college education is far too expensive, and much of what is taught at the universities is not useful.  Wiping out student debt will bring some relief to millions of college borrowers. But if the colleges don't change how they do business, the student-debt crisis will not be solved.








Sunday, January 31, 2021

When did university book stores become T-shirt shops?

 I live about a mile from the Barne & Noble bookstore, the official bookstore for Louisiana State University. Yesterday, I walked over for a cup of hot chocolate at the bookstore's Starbucks coffee shop.

While the barista was constructing my cocoa (a laborious business), I contemplated the murals above the counter. Overhead, I saw some of the great English-language authors: Faulkner, Hardy, Joyce, Kipling, Melville, Nabakov, Shaw, Whitman, and others. 

I found myself wondering whether Barnes & Noble sold any books by the authors who are celebrated at Starbucks.  It is a college bookstore, after all.

So I went upstairs to the store's tiny "fiction and literature" section and looked for works by these famous writers.  Most of them I couldn't find: no Kipling, no Nabakov, no Whitman. 

I did see some comic books, however, in a section titled "graphic novels."  And I saw a hell of a lot of  $20 LSU T-shirts, $70 LSU sweatshirts, and hundreds of LSU ballcaps, selling for $25 a pop.

I also saw $9 LSU wine glasses and $27 LSU waterbottles. And I saw a pile of stuffed animals depicting Mike, the LSU tiger mascot.

In fact, as I scanned both floors of LSU's bookstore, I realized that Barnes & Noble's campus address isn't a bookstore at all; it's a T-shirt shop.  Yes, it sells some textbooks in an obscure corner, but most of the space is dedicated to overpriced souvenirs. 

I am not saying LSU students should be reading the authors who are memorialized at the Starbooks coffee shop.  I've read some Faulkner, some George Bernard Shaw, some of Henry James's excruciatingly dull novels. In my opinion, students can skip all that.

But I find it unsettling to see LSU students swiping their credit cards to buy exorbitantly priced junk and $5 lattes. Why? Because I know many of these students are purchasing that stuff with their student-loan money. 

If these students graduate and can't find good jobs--and many of them won't--what will be their best option? For millions, it will be to sign up for a 25-year income-based repayment plan. That's a high price to pay for an LSU T-shirt.






Wednesday, January 20, 2021

Immigrant obtains medical degree, can't find MD job. Bankruptcy judge discharges $400,000 in student-loan debt

Seth Koeut was born in Cambodia and came to the United States as a child. Like many immigrants, he applied himself energetically to obtain a better life. He graduated 6th in his high school class and went on to earn two bachelor's degrees from Duke University.

Mr. Koeut then went to medical school and received an MD from Ponce School of Medicine in Puerto Rico. Somewhere along the way, he learned to speak English, Cambodian, Spanish, French, and Italian.

Although he passed his Medical Board exams, Koeut could not obtain a residency, which is a prerequisite to obtaining a medical license. After applying for residencies for five years, he gave up hope of becoming a licensed physician in the United States.

Over the years, Koeut held various jobs, including sales clerk at Banana Republic, a dishwasher at a Mexican restaurant, and parking lot signaler.

Finally, Koeut filed for bankruptcy and asked Bankruptcy Juge Margaret Mann to discharge his student-loan debt, which totaled $440,000. A vocational evaluation expert assessed Koeut's job prospects and said Koeut would need additional training to meet his employment potential.

The U.S. Department of Education (DOE) opposed Koeut's application for a student-loan discharge and argued that he should be put in a long-term, income-based repayment plan (IBR). DOE also said Koeut failed to reach his employment potential because of a lack of initiative.

But Judge Mann disagreed. "A medical school graduate who works as a parking attendant and dishwasher cannot be described as lazy," she observed. She approved of Koeut's decision not to sign up for an IBR, which he rejected "because he could not carry the burden of his student debt without harming his opportunities for advancement."

In the end, Judge Mann discharged almost all of Koeut's student debt, finding that his current income and expenses did not permit him to maintain a minimum standard of living--even without making loan payments.

The Koeut case may be a sign that the bankruptcy judges are weary of DOE's incessant demands to put distressed student-loan debtors into IBRs. And perhaps they have grown tired of DOE's insistence that every bankrupt debtor's financial distress is entirely the debtor's fault.

Indeed, one cannot read Judge Mann's opinion without concluding that Seth Koeut had done everything possible to improve his standard of living and had handled his massive student-loan debt in good faith. Let us hope for more bankruptcy court decisions like Koeut v. U.S. Department of Education.


References

Koeut v. U.S. Department of Education, 622 B.R. 72 (Bankr. S.D. Cal. 2020).




Thursday, January 7, 2021

Pro quarterback Tom Brady gets $1 million in PPE money plus tax break, but no tax breaks for distressed student loan debtors

 According to CNBC, Tom Brady, the Tampa Bay Buccaneers' highly-paid quarterback, got a check for $960,00 from the Smal Business Administration's Payroll Protection Plan. Why? Because, besides playing football, Mr. Brady owns a sports and nutrition company.

Does Mr. Brady need the money? Earlier this year, he signed a $50 million two-year deal to play football for the Buccaneers.

And Mr. Brady gets a tax break that goes with that $960,000 check.  Brady and everyone who received a PPP check can deduct their business expenses for the year, even if they paid those expenses with the federal government's free money.

Is this a great country or what!

Meanwhile, nine million student-loan debtors who are enrolled in long-term income-based repayment plans (IBRPs) have enormous tax bills hanging over their heads.  

IBRPs allow college-loan borrowers to make monthly payments on their loans based on their income. If they make regular payments for 20 or 25 years, the balance on their loans is forgiven. However, the amount of forgiveness is considered taxable income by the IRS.

I do not quarrel with Congress's COVID-relief legislation. Perhaps it is good public policy to give Tom Brady a million bucks while my relatives get a lousy $600.

I just hope my children and grandchildren will become rich enough someday to qualify for government handouts.





Saturday, January 2, 2021

Say goodbye to your golden years: 100 million Americans have no retirement savings

According to the  National Insitute on Retirement Security, more than 100 million Americans have no retirement savings whatsoever. 

As Diane Oakley, NIRS executive director, observed:

The facts and data are clear. Retirement is in peril for most working-class Americans . . . When all working individuals are considered--not just the minority with retirement accounts--the typical working American has zero, zilch, nothing saved for retirement.

The NIRS partly blamed the 2007 recession for the bad news. But the report was issued in 2018--before the coronavirus put millions of people out of work.  Over the past year, Americans have dipped into their savings and their retirement accounts just to pay today's bills.

 A 2019 survey also reported bad news for American retirees. A GobankingRanks survey concluded that almost two out of three Americans (64 percent) will retire broke. And--shockingly--nearly half of the people surveyed said they'd didn't care!

Clearly, millions of Americans are not preparing for their retirement years. Many workers don't make enough money to fund a retirement account, and others are overwhelmed with consumer debt--home mortgages, car payments, and credit card bills.

And student-loan debt is a significant contributor to Americans' precarious financial status. More than 40 million people have outstanding student debt, and less than half that number are paying it off. Nine million student-loan debtors are in long-term income-based repayment plans, which means they will never pay down their loan balances.

What is going to happen to all these impecunious Americans when they reach retirement age?

A great many will just keep working until they die or become too incapacitated to be a Walmart greeter. Others will tap the equity in their homes or draw down their meager savings just to pay their utility bills. Some will move in with their kids--who will have their own financial troubles.

As a recent New Yorker article noted, there is a growing movement to increase the minimum wage to $15 an hour. I hope Congress does exactly that.

Nevertheless, even if the minimum wage is roughly doubled, elderly Americans who work full-time at Wendy's for $15 an hour will generate just enough income to keep them above the poverty line.

Working on their feet for eight hours a day will be difficult for people in their seventies.  Many will have to pop Chinese-manufactured Advils to keep their arthritis under control.  But it can be done.

But the days when Americans referred to retirement as the Golden Years are over.  For many Americans, their last years will not be golden. They will be difficult, bitter, and depressing.

photo credit: finance.yahoo.com



Friday, January 1, 2021

Post-Modern America is as vicious and dysfunctional as Victorian England, the Weimar Republic, and 17th century France

If you get your news from network television, you are being bombarded by commercials about prescription medicines and financial services. 

These ads typically show prosperous older Americans who look remarkably fit, live in lovely homes, and spend their days cooking gourmet meals, wind-surfing, and flyfishing with their adorable grandchildren.

These advertisements purport to show life in 21st century America--the best of all possible worlds where everyone is healthy, happy, and financially secure.

But I don't live in that America, and you don't either. Instead, most of us live in a society that is remarkably similar to dysfunctional regimes of bygone centuries.

Our government is printing money at a frightening pace to prop up the financial markets, much like the Weimar Republic did in the 1920s. And we know how that turned out. Germany experienced runaway inflation that set the stage for Adolph Hitler.

We may celebrate the fact that the United States abolished debtors' prisons, but 21st century America treats debtors much the way England treated them in the Victorian age. 

We don't deport debtors to Australia or put them in jail as England did in Charles Dickens' time, but we've created a virtual prison for student-loan borrowers, millions of whom are trapped in income-based repayment plans that last 25 years. Compounding student-debtors' misery, our supposedly benevolent Congress has made it almost impossible for insolvent student-loan debtors to get relief in the bankruptcy courts.

And the American tax system is remarkably like the tax regime in Louis XIV's France. W.H. Lewis, who wrote a masterful social history of seventeenth-century France, described the French tax structure this way;

[T]he whole fiscal system was in itself radically and incurably vicious; as a contemporary remarks, if he Devil himself had been given a free hand to plan the ruin of France, he could not have invented any scheme more likely to achieve that object than the system of taxation in vogue, a system which would seem to have been designed with the sole object of ensuring a minimum return to the King at a maximum price to his subjects, with the heaviest share falling on the poorest section of the population.

Doesn't that sound like the American tax system? Sure it does. As financial tycoon Warren Buffett has repeatedly observed, he pays federal taxes at a lower rate than his secretary.

And the COVID pandemic didn't change the system at all. Indeed, the latest coronavirus relief package includes 100 percent deductibility for the so-called "three-martini lunch." Think about it: wealthy Americans can write off extravagant meals that can cost more than $1,000, while the working stiff gets a $600 coronavirus-relief check.

 In short, although Americans may deceive themselves into believing that our society is evolving into a paradise based on the principles of equity, diversity, and inclusion, in fact, we live in a world not so very different from Victorian England, Weimar Germany, and 17th century France.

Louis XIV: Is everybody happy?


Monday, December 7, 2020

Is massive student-loan forgiveness off the table? The insiders prefer long-term, income-based repayment plans and that's what student debtors are likely to get

Remember the heady days of the 2020 presidential primaries? Democratic nominees proposed massive student-loan forgiveness, and some promised a free college education. 

This is what Vice President Joe Biden promised last April:

The concept I’m announcing today will align my student debt relief proposal with my forward-looking college tuition proposal. Under this plan, I propose to forgive all undergraduate tuition-related federal student debt from two- and four-year public colleges and universities for debt-holders earning up to $125,000. . . . The federal government would pay the monthly payment in lieu of the borrower until the forgivable portion of the loan was paid off. This benefit would also apply to individuals holding federal student loans for tuition from private HBCUs and MSIs.

But the election is over, and the political insiders have had time to reflect on massive loan forgiveness. As the Washington Post editorialized just a few days ago,

[W]wholesale debt relief is actually the antithesis of progressive policy. Most benefits would flow to upper-income households, which, despite the undeniable burden of debt for lower-income families, actually owes a disproportionate share of the total [student-loan] dollars. 

 The Post disapproves of the relief plan put forward by Senators Elizabeth Warren and Charles Schumer.  They want Biden to forgive student-loan debt up to $50,000 per borrower.  Biden himself has trimmed back his April proposal and now only wants Congress to forgive $10,000 in student debt.

I think massive student-loan relief is off the table. Instead, I think the Department of Education--acting with or without Congressional action--is more likely to offer more generous income-based repayment plans.

In fact, that is exactly what the Washington Post is endorsing. Citing a study by Sylvain  Catherine and Constantine Yanellis, the Post says the feds should "mak[e] sure that everyone who qualifies enrolls in an existing plan that links repayment to a borrower's income."

But tinkering with income-based repayment plans (IBRPs) will not solve the student-loan crisis. 

Nine million people are in them now, and virtually none of them are paying down the principal on their loans.  College borrowers who stick it out will eventually get their student loans forgiven, but the canceled debt is considered taxable income by the Internal Revenue Service.

Making IBRPs more generous, which the new administration might do, is just a student-loan forgiveness program in disguise.  It would do nothing to change the status quo, allowing students to borrow too much money to attend college and the universities to charge tuition that is far too high.

As Steve Rhode argued in a recent essay, the solution to the student-loan crisis is to ease restrictions on bankruptcy relief for distressed college-loan borrowers.  All that needs to be done is to remove the "undue hardship" language from the Bankruptcy Code and allow student-loan debtors who are truly insolvent to discharge their loans in bankruptcy.

But perhaps that solution is too simple for the crafty minds of our politicians and our college leaders.  Instead of giving student borrowers a fresh start in bankruptcy,  they will likely concoct another complicated and labyrinthine IBRP.







Monday, July 6, 2020

Trejo v. U.S. Department of Education: A Texas bankruptcy judge grants student-loan discharge to 47-year-old single mom

The Sad Case of Jessica Trejo

In 2017, Jessica Trejo filed an adversary action in a Texas bankruptcy court, seeking to discharge $90,000 in student-loan debt. Ms. Trejo had borrowed about $65,000 to attend three Texas colleges. She also took out a Parent Plus loan for $13,522 to help pay for her eldest daughter's college education. And she owed a little over $7,000 in accrued interest.

At the time of trial, Ms. Trejo was a 47-year-old single mother with two dependent daughters. Both daughters were "afflicted with serious Type II diabetes, high blood pressure, psoriasis, eating disorders, severe depression, suicidal tendencies, and Attention-Deficit Hyperactivity Disorder" (p. 2). Ms. Trejo testified that she had to continually monitor her daughters' activities due to their depression and suicidal tendencies.

From 2008 until 2013, Ms. Trejo took college courses on a part-time basis at Tarrant County College, Hill College, and Texas Wesleyan University. Her ultimate goal was to get a degree in bilingual education. However, "because of her family and financial situation, she no longer intend[ed] to return to college or obtain a degree" (p. 3).

At the time she filed for bankruptcy, Ms. Trejo's financial situation was precarious. As Judge Mark Mullin observed, Ms. Trejo had not had a full-time job in the last 15 years. She had worked part-time at a nail salon, but she gave up that work to care for her daughters. Due to her daughters' disabilities, she received Supplemental Security Income (SSI) checks from the Social Security Administration, totaling $1470 a month.

The U.S. Department of Education opposed Ms. Trejo's request for student-loan relief, arguing that she should sign up for a 25-year income-based repayment plan. According to DOE, Ms. Trejo's income was so low that she would not be obliged to pay anything under such a program (p. 4).

Judge Mullin applies the Brunner test and discharges Ms. Trejo's student-loan debt.

Judge Mullin applied the three-part Brunner test to determine whether it would work an undue hardship on Ms. Trejo if she were forced to repay her student loans. In Judge Mullin's view, Ms. Trejo met all three parts of that test.

First, the judge ruled that Ms. Trejo could not maintain a minimal standard of living for herself and her two dependent daughters if forced to pay her student loans.

Second, Ms. Trejo had shown that her financial situation was not likely to improve in the foreseeable future.

Third, Judge Mullin ruled that Ms. Trejo had handled her student debt in good faith. Although she had not made any payments on her student loans, she never had the financial wherewithal to do so.

Implications of the Trejo decision

Judge Mullin made the right decision when he discharged Ms. Trejo's student-loan debt. Clearly, she could not maintain a minimal standard of living for herself and her family and pay back her student loans. And, as Judge Mullins recognized, it was highly unlikely that Ms. Trejo's financial situation would improve significantly in the years to come.

The Trejo decision is a significant decision for at least three reasons. First, Judge Mullin flatly rejected DOE's tired argument that distressed student-loan debtors should be forced into long-term income-based repayment plans instead of getting their loans discharged in bankruptcy.  Over the years, DOE has snookered some bankruptcy judges with that silly argument, but those days may be over. It is absurd to deny an honest debtor bankruptcy relief in favor of a 25-year plan that requires the debtor to pay nothing.

Second, Judge Mark Mullin is one of a growing number of bankruptcy judges who are interpreting the Brunner test compassionately and with a dose of common sense. Judge Mullin took great care to write a judicial opinion that will be difficult to overturn on appeal. His decision contained 124 footnotes showing that his ruling was based on evidence in the trial record.

Finally, the Trejo decision prompts us to think about the enormous cost of higher education today, particularly when we consider how often the college experience does not lead to a good job.  Ms. Trejo borrowed about $65,000 to pay tuition at three colleges and got minimal benefit from the experience. Nevertheless, all three institutions that took Ms. Trejo's tuition money get to keep it.

We need to find a better way to provide low-income people like Jessica Trejo with the postsecondary education and training they need to become self-sufficient citizens. Clearly, the federal student loan program, as it is now operating, is not doing a good job.



References

Trejo v. U.S. Department of Education, Adversary No. 17-4052, 2020 WL 1884444 (N.D. Tex. Apr. 15, 2020).

Wednesday, January 29, 2020

"Deserves got nothin' to do with it": Is Elizabeth Warren's student-loan forgiveness plan fair to people who played by the rules?

An Iowa man challenged Senator Elizabeth Warren about her student-loan forgiveness plan during a campaign event in Grimes, Iowa.

"I just wanted to ask one question," the man said to Warren. "My daughter is getting out of school. I've saved all my money. She doesn't have any student loans. Am I going to get my money back?" he said.

"Of course not, Warren replied.

"So you're going to pay for people who didn't save any money and those of us who did the right thing get screwed," the man said.

"No, you're not going to get screwed," Warren lamely responded.

I get the Iowa guy's point. It seems unfair to grant wholesale student-loan forgiveness to millions of people, while parents who made severe financial sacrifices to pay for their children's college education get no relief.

But let's face it. About half of all student loans are not being paid back anyway. That's right--about half.

More than a quarter of all student-loan borrowers default on their student loans within five years. Another 20 percent or so are in income-based repayment plans that are structured so that the borrowers never pay off their loans. And then there are millions of people who have their loans in forbearance or deferment, while interest piles upon the principal of their debt. 

In a way, Senator Warren's student-loan forgiveness plan is like President Jimmy Carter's decision to grant amnesty to the young men who fled to Canada to escape the draft during the Vietnam War. Critics said it was unfair for draft dodgers to suffer no penalties while millions of Americans went into the Army and more than than 50,000 Americans died in the jungles of Vietnam.

Unfortunately, huge moral quagmires have no clear-cut solutions. The Vietnam War was an enormous national tragedy, a senseless and immoral affair. Or so I believe.

Likewise, the student-loan crisis is a moral crisis. Forty-five million people are carrying student-loan debt that totals $1.6 trillion and millions of these people got little or no financial benefit from their college experience.  

The for-profit colleges raked in enormous wads of federal cash and dished out overpriced and often worthless college degrees. The law schools and business schools jacked up the prices of their professional programs simply to suck up more federal money, and a lot of that money went toward bloated salaries for college administrators.

There is no perfectly fair solution to this crisis.  As a nation, we simply must grant relief to suffering college-loan debtors.  And Senator Warren's plan is a reasonable proposal for doing that.

Personally, I would prefer for Congress to amend the Bankruptcy Code and allow insolvent debtors to discharge their student loans through bankruptcy.  That would be fairer to people like Senator Warren's critic in Grimes, Iowa.

But the student-loan catastrophe has got to be addressed head-on.  Senator Warren's plan and Senator Sanders' plan are pretty good solutions.  In my opinion, bankruptcy relief is a better solution. 

Any plan will benefit some people who do not deserve student-debt relief. But as Clint Eastwood's character said in the movie The Unforgiven, "Deserves got nothin' to do with it." 

Let's move forward to clean up the student-loan program before it totally destroys the integrity of higher education--not to mention America's middle class.


"Deserves got nothin' to do with it." 









Friday, October 25, 2019

Education Department official says he will resign and calls for massive student-loan forgiveness: Does he have a good idea?

Mr. A. Wayne Johnson, the Department of Education's "chief strategy and transformation officer," announced his resignation this week and called for massive forgiveness of student-loan debt.

 Johnson, who was appointed to his DOE position by Education Secretary Betsy DeVos, proposes to forgive all federal student loan debt up to $50,000 per student. And he's also calling for a $50,000 tax credit for people who have already repaid their loans.

Senators Bernie Sanders and Elizabeth Warren, both presidential candidates, are also calling for wholesale forgiveness of student loans. Johnson's plan is more generous than Senator Warren's proposal, which puts income caps on student-loan forgiveness. On the other hand, Senator Sanders'  plan is even more generous than Johnson's. Bernie calls for forgiving all student-loan debt--about $1.6 trillion dollars with no income cap. Johnson's proposal would cost taxpayers less--an estimated $925 million.

Is massive student-loan forgiveness a good idea? I think it is. Johnson is right; the student loan program is "fundamentally broken." Even Secretary DeVos compared the program to a looming thunderstorm and admitted last year that only 24 percent of student debtors are paying back both principal and interest on their loans.

Indeed, virtually no one in the government's income-based repayment plans (IBRPs) will pay back their student loans because their monthly payments are not large enough to pay down accumulating interest on borrowers' underlying debt.  About 7.3 million people are in IBRPs, and millions more have defaulted on their loans or have them in deferment.

We know that massive student-loan indebtedness is hindering young people from getting married, having children, and buying homes. Researchers at Bard  College's Levy Economics Institute concluded that student-loan forgiveness would actually stimulate the national economy by freeing up money for student debtors to purchase houses and consumer goods.

Personally, I'm OK with all three student-loan forgiveness proposals: Johnson's, Warren's and Sanders'. Let's face facts; most of these loans will never be paid back.

But I think a better option would be for Congress to remove impediments to discharging student loans in bankruptcy, which it can easily do.  Congress just needs to pass a law that would remove the words "undue hardship" from the 11 U.S.C.  § 523(a) of the Bankruptcy Code.

Amending the Bankruptcy Code would allow federal bankruptcy judges to decide, on a case-by-case basis, which student-loan borrowers are truly insolvent and deserving of relief. These judges have the experience and the authority to weed out fraudulent claims and restrict debt relief to worthy candidates.

Massive student-loan debt relief without regard to individual circumstances would allow all 45 million student-loan borrowers to shake off their student debt--even those who obtained good value from their educational experiences and have the financial means to pay off their loans. I don't think that is good public policy.

Nevertheless, if the choice is between massive student-loan relief and the present system, I'm in favor of the plans put forward by Mr. Johnson, Senator Warren, and Senator Sanders. As I said, most of these loans will never be paid back and forcing millions of distressed student-loan debtors into 20- or 25-year income-based repayment plans just subjects them to a lifetime of stress, anxiety, and needless suffering.

A. Wayne Johnson will resign from Department of Education: Bye-bye, Betsy











Sunday, September 8, 2019

Wall Street Journal decries "The Great Student-Loan Scam": But the flimflam is even worse than WSJ describes

Last month, the Wall Street Journal published an editorial titled "The Great Student-Loan Scam," in which the newspaper excoriated the Obama administration for the way it handled the federal student loan program. According to WSJ, Democrats "nationalized" the student-loan market in 2010 to help pay for Obamacare.  Eliminating private lenders, Democrats said, would save taxpayers money.

Indeed, the Congressional Budget Office treated the federal student-loan program as a profit center during the Obama years by projecting that it would actually make money. Remember when Senator Elizabeth Warren accused the program of raking in "obscene" profits?

But of course, the student-loan program is not a profit center. It's been bleeding red ink for years.  The Obama administration's generous income-based repayment plans (PAYE and REPAYE) were touted as compassionate programs to relieve overburdened student borrowers and keep them out of default. But the plans were structured so that most borrowers aren't paying down the principal of their loans.

As one Obama-era advisor recently admitted, "There will be substantial amounts of student debt that will never be repaid." Oh, yeah. Most of it will never be repaid.

In fact, the student-loan crisis is worse than the Wall Street Journal characterized it. A Brookings Institution report, issued several years ago, projected that almost half of all student loans taken out to attend for-profit colleges would be in default within five years after entering repayment.

Education Secretary Betsy DeVos, of all people, candidly acknowledged how bad the situation is last November.  "[O]nly 24 percent of FSA borrowers--one in four--are currently paying down both principal and interest," DeVos said in a speech. Almost 20 percent of borrowers are delinquent on their loans or in default. And, by DeVos's calculations, 43 percent of all outstanding loans "are in distress" (whatever that means).

 Unfortunately, although DeVos is honest about the scope of the student-loan crisis, she is doing all the wrong things. DeVos's DOE bungled the Public Service Loan Forgiveness program, rejecting 99 percent of the initial applications for debt relief. And just a few days ago, the Education Department issued new regulations that make it more difficult for student borrowers to bring fraud claims against for-profit colleges.

In short, the Wall Street Journal accurately labeled the federal student-loan program as "the great student-loan scam." But the program is much worse than that. About 45 million Americans hold a combined total of $1.6 trillion in federal student loans, and at least half of those people will carry their student-loan debt to their graves. Yes, the federal student-loan program is more than a giant scam, it's a national catastrophe.







Friday, August 23, 2019

Warning: It can be dangerous to go to college if you are middle-aged

If you are 40 years old and don't have a college degree, you probably want one.  On average, people with college degrees make more money over the course of their lives than people without degrees.

Nevertheless, if you are in your  forties, fifties, or sixties, you must be careful about taking on debt, because you have fewer working years than a younger person to pay it back. And people in midlife or older need to be putting money away for their retirement.

That's why a report issued by the Department of Education earlier this month should be concerning to older Americans. The report is short--just two pages long, but it contains some interesting findings.

Twenty-five years ago, 60 percent of college completers in their twenties (age 24-29), took out student loans to pay for their education. Older graduates borrowed less. Only  about a third of graduates in their forties left college with student debt. Among people aged 50 or older, only 19 percent graduated with student debt.

But student-borrowing patterns have changed. In 2015-2016, 66 percent of college graduates in their twenties had taken out student loans. And among people in their forties, 71 percent had student debt when they graduated. In other words, for people who graduated college in their forties, the percentage who carried debt has doubled over 25 years (from 35 percent to 71 percent).

Moreover, the amount of student-loan debt taken out by students in their forties quadrupled between 1995-1996 and 2015-2016. Twenty-five years ago, people in their forties graduated with an average student-loan debt of $4,400. In 2016, this same age group graduated with $18,800 in student-loan debt (in constant dollars).

The DOE report's findings don't suggest that middle-aged people should not seek a college degree. It is probably a good idea for nearly everyone. But the report contains an implicit warning to older college students: Don't take out more student loans than absolutely necessary because you may have a very difficult time paying it back.

Already, millions of student debtors are enrolled in 25-year income-based repayment plans. A 25-year-old in such a plan will be 50 years old before he or she makes the last loan payment. But a person who graduates at age 50 and is forced into a 25-year repayment plan will be 75 years old. before the plan ends.

Who wants to be making student-loan payments during their retirement years? And remember, elderly people who default on their student loans can see their Social Security checks garnished. Bummer!

Did I make my monthly student-loan payment this month?


References

U.S. Department of Education (2019, August). Changes in Undergraduate Program Completers' Borrowing Rates and Loan Amounts by Age: 1995-1996 Through 2015-2016.

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.



Wednesday, November 21, 2018

Hopson v. Illinois Student Assistance Commission: A clueless bankruptcy judge sentences a 63-year-old student-loan borrower to a lifetime of indebtedness

Janice Faye Hopson, 63 years old, went to trial in an Illinois bankruptcy court last spring, hoping to discharge more than $100,000 in student loans. The Illinois Student Assistance Commission and the U.S. Department of Education opposed her plea for relief; and Judge Jacqueline Cox, the bankruptcy judge who heard Hopson's case, ruled against her.

At the time of Judge Cox's ruling, Hopson was in a 25-year income-based repayment plan (IBRP) that required her to make monthly payments of zero due to her low income. Indeed, Judge Cox ruled that Hopson could maintain "a substantial standard of living" while making student-loan payments of zero dollars a month (588 B.R. 518).

Hopson argued that she would never pay back $100,000 in student loans under a 25-year IBRP and that the principal on the loan will continue to grow in the coming years due to accruing interest. When the 25-year plan ends, Hopson will likely be in her 80s. Moreover, although DOE will write off the amount of her unpaid debt when the 25-year repayment plan is completed, that amount will be taxable to her as income.

Judge Cox was unsympathetic. If Hopson is insolvent when her 25-year plan ends, Judge Cox pointed out, she can file for bankruptcy a third time and discharge her tax bill on the grounds that she is broke (588 B.R. at 515).

Will Ms. Hopson be insolvent when her IBRP ends two decades from now? Of course she will. At age 63, she has virtually no retirement savings (as Judge Cox acknowledged). Twenty years from now, she undoubtedly will be living entirely off her Social Security checks, estimated to be only $1430 a month.

Although Judge Cox probably did not realize it, she essentially ruled that no student debtor who is eligible for a long-term income-based repayment plan is entitled to bankruptcy relief. Of course it is true in one sense that a person allowed to make student-loan payments of zero dollars a month cannot claim her student loans constitute an "undue hardship" in the present moment. But people making token monthly payments or even monthly payments of zero are burdened by student-loan debt that grows with each passing month due to accruing interest and which will never be repaid.

They are also burdened by the specter of a huge tax bill when DOE eventually writes off their loans two decades or more into the future. Like Ms. Hopson, many people will be long past retirement age when their IBRP payment obligations come to an end. And like Ms. Hopson most people in IBRPs won't have sufficient retirement savings to live their last years in comfort and dignity.

*****

A few notes in closing. First, Judge Cox ruled that Ms. Hopson could maintain a "substantial standard of living" while making student-loan payments of zero dollars a month. Apparently, the judge concluded Hopson was living above a minimal lifestyle because she rented a two-bedroom apartment. Judge Cox pointed out Hopson could save $225 a month if she moved into a one-bedroom apartment.

Second, Adam Merrill, a Chicago lawyer, represented Ms. Hopson pro bono. I want to especially commend him for taking on Ms. Hopson's case without a fee.

Finally, Judge Cox did not state in her opinion when Ms. Hopson's 25-year repayment plan will end. Perhaps the date was not important to the judge.  In this essay I presumed that Hopson signed up for a 25-year repayment plan fairly recently and that it won't conclude until she is in her 80s.

Judge Jacqueline Cox: No mercy for a 63-year-old student-loan debtor


References

Hopson v. Illinois Student Assistance Commission, 588 B.R. 509 (Bankr. N.D. Ill. 2018).

Friday, July 13, 2018

Michelle Singletary gives good financial advice to young people about student loans, and here are my two cents (think La Brea tar pits)

Michelle Singletary, a syndicated columnist for the Washington Post, gives good advice  to young people about managing debt--including student loans. She published a very good article awhile back that contained two good pieces of advice. I will summarize her suggestions and add my own two cents.

First, Singletary challenges the conventional wisdom that young people should begin saving for retirement as early as possible--while still in their 20s.  "Millennials' money is often too tight," she counseled, "and for the many who have student loans, they may be best served spending the first years aggressively paying off this debt."

I agree completely. It makes no sense for young people to put money in IRAs or other retirement accounts if they aren't managing their student loans. After all, if they accumulate student-loan debt that becomes so large they can't make their monthly payments, they'll wind up in 25-year income-based repayment plans, which may prevent them from ever retiring.  It is absolutely critical for millennials to get their student loans paid off as quickly as possible.  For young people, there will be plenty of time later to save for retirement after they pay off their student loans.

Singletary also signaled her disagreement with commentators who lament the high percentage of young adults who live with their parents. It is true that more people in their 20s are living with Mom and Pop; 28 percent, according to Singletary, up from just 19 percent in 2016.

But that may not be a bad thing. If a young person can economize by living with parents, why not do so? That leaves more money to save for a down payment on a house or for paying student loans off early.

Now here are my two cents.

When taking out college loans, students should keep in mind the possibility that they won't find a good job after graduating. If their student loan debt is modest, they can probably make their monthly payments even if they are in a low paying job. But if they borrowed a lot of money and can't make the initial monthly payments, they will be forced to apply for an economic hardship deferment, which are very easy to get.

Those deferments excuse borrowers from making monthly loan payments, but compound interest accrues on the principal. Borrowers who put student loans in deferment for three years will find their loan balances will have grown substantially.

Then--if they can't make regular payments on the larger balance, student borrowers will be pushed into 20- or 25-year income-based repayment plans. In my view, that is a disastrous outcome for young people who took out student loans to improve the quality of their lives, not fall into a lifetime of indebtedness.

And here is some more of my two cents. Never take out private student loans from Wells Fargo, Sallie Mae or any of the other blood suckers who offer private student loans. Those loans are just as hard to discharge in bankruptcy as federal student loans.  And when I say never take out private student loans, I mean never.

Finally, to reiterate advice I have given tirelessly for many years, don't ask your parents to take out a Parent PLUS loan to finance your college studies; and don't ask them to co-sign any of your student loans. If you love Mama and Daddy, don't suck them into a veritable La Brea tar pit of perpetual student-loan indebtedness, especially if you are already in the tar pit yourself.

La Brea Tar Pits


References

Michelle Singletary. Millennials get plenty of financial advice-but most of it is wrong. Herald-Tribune, May 22, 2018.






Thursday, June 21, 2018

Smith v. U.S. Department of Education: A severely stressed student-loan debtor gets bankruptcy relief and the judge questions harsh interpretation of "undue hardship"

Kirt Francisco Smith, a 39-year-old unemployed man with severe health problems, won a bankruptcy discharge of his student-loan debt--almost $50,000.

 Every student-loan debtor's victory in bankruptcy court is something to celebrate; we don't see enough of them. Smith's victory, however, is especially cheering because the judge explicitly challenged the harsh standards the federal courts are using when determining whether student-loan debt is an "undue hardship" eligible for bankruptcy discharge.

Here's Mr. Smith's story as as chronicled by Bankruptcy Judge Frank Bailey. Smith took out $29,000 in student loans to enroll in a computer drafting program at ITT Tech. He completed the program in 2008  but was unable to find a job in the computer drafting field. By the time he filed for bankruptcy his debt had grown to $50,000 due to accumulated interest and fees.

Smith suffers from major health problems. He is afflicted with intractable epilepsy, which prevents him from having a driver's license. In addition, Smith has been diagnosed with affective disorders, including anxiety and depression leading to suicidal ideation. In 2006, he was hospitalized at McLean Psychiatric Hospital; and he has not been employed since that hospitalization. He began receiving Social Security Disability payments in 2007.

During the trial, which stretched out over five days, Smith argued that he could not pay back his student loans and maintain a minimal standard of living for himself and his dependent mother.  And indeed, Smith and his mother lived on the brink of utter poverty.

Smith received $1369 a month in Social Security income and his mother received $792.26 in Social Security. The two also receive food stamps, which the judge included as income. Altogether then, Smith and his mother lived on $2265.26 a month, which is about $80 less than their expenses.

The U.S. Department of Education opposed a discharge of Smith's student loans, dragging out its usual objections. Smith never made a single payment on his loans, DOE argued, and therefor did not handle his loans in good faith. Smith did not renew his paperwork to stay in an income-based repayment plan--another sign of bad faith.  Finally, DOE objected to the modest sums Smith spent on travel and entertainment.

Fortunately for Smith, Judge Bailey rejected all DOE's arguments and discharged Smith's student loans. The judge utilized the "totality-of-circumstances" test for determining whether Smith's student loans constituted an undue hardship rather then the harsher Brunner test.

Remarkably, Judge Bailey criticized both the Brunner test and the totality-of-circumstances tests. "I pause to observe that both tests for 'undue hardship' are flawed," he wrote (p. 565). In the judge's view, "[t]hese hard-hearted tests have no place in our bankruptcy system."

Judge Bailey then went on to articulate a more reasonable standard for determining when a debtor's student loans can be discharged in bankruptcy.  "If a debtor has suffered a personal, medical, or financial loss and cannot hope to pay now or in the reasonably reliable future," the judge reasoned, "that should be enough" (p. 565).

In particular, Judge Bailey criticized other courts' focus on the debtor's good faith.
[A]ny test that allows for the court to determine a student debtor's good or bad faith while living at a subsistence level, virtually strait-jacketed by circumstances, displaces the focus from where the statute would have it: the hardship. It also imposes on courts the virtually impossible task of evaluating good or bath faith in debtors whose range of options is exceedingly limited and includes no realistic hope of repaying their loans to any appreciable extent.. (p. 566)
What an astonishing decision! To my knowledge, Judge Bailey is the first bankruptcy judge to explicitly attack both the Brunner test and the totality-of-circumstances test. (Judge Jim Pappas criticized the Brunner test in Roth v. ECMC.) Just think how many suffering student-loan debtors would qualify for bankruptcy relief if every judge reasoned like Judge Bailey.

Brenda Butler,  for example, who handled her student loans in good faith only to see her loan balance double over a 20 year period, would have obtained relief if Judge Bailey had been her judge. Ronald Joe Johnson, a bankrupt student-loan debtor who made $24,000 a year by working two jobs, would be free of his student loans if he had appeared in Judge Bailey's court instead of a bankrkuptcy court in Alabama. Janice Stevenson, a woman in her mid-fifties who had a record of homelessness and who lived in rent-subsidized housing and had an income of less than $1,000 a month, would have won a bankruptcy discharge of more than $100,000 in student debt if only Judge Bailey's standard had been applied rather than the harsh rule applied by Judge Joan Feeney.

Today, Judge Bailey's decision in the Smith case is just a straw in the wind, but the day will come when bankruptcy courts will apply his standard universally. After all, as some wise person observed, if a debt cannot be paid back, it won't be.  Right now, about 20 million people are unable to pay back their student loans.  Almost all of them are entitled to bankruptcy relief under the rule articulated by Judge Frankk Bailey.

References

Butler v. Educational Credit Management Corporation, No. 14-71585, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).

Johnson v. U.S. Department of Education, 541 B.R. 750 (N.D. Ala. 2015).

Roth v. Educational Credit Management Corporation490 B.R. 908 (9th Cir. B.A.P. 2013). 

Smith v. U.S. Department of Education (In Re Smith), 582 B.R. 556 (Bankr. D. Mass 2018).

Stevenson v. ECMC, Case No. 08-14084-JNF, Adv. P. No. 08-1245 (Bankr. D. Mass. August 2, 2011)

Saturday, January 27, 2018

Student loans--the other debt crisis. Credit Slips essay by Alan White

Student loans - the other debt crisis

posted by Alan White at creditslips.org
In a low unemployment economy, an entire generation is struggling, and millions are failing, to repay student loan debt. As many as 40% of ALL borrowers recently graduating are likely to default over the life of their student loans, according to a recent Brookings Institute analysis. Total outstanding student loan debt is approaching 1.5 trillion dollars, exceeding credit card debt, exceeding auto loan debt. Two other key points from the Brookings analysis: 1) for-profit schools remain the primary driver of high student loan defaults, and 2) black college graduates default at five times the rate of white college graduates, due to persistent unemployment, higher use of for-profit colleges and lower parental income and assets.
The rising delinquency (11% currently) and lifetime default rates are all the more disturbing given that federal student loan rules, in theory, permit all borrowers to repay based on a percentage of their income. Most student loans are funded by the U.S. Treasury, but administered by private contractors: student loan servicers. Study after study has found that student loan borrowers are systematically assigned to inappropriate payment plans,  yet the U.S. Education Department continues renewing contracts with these failing servicers. The weird public-private partnership Congress has created and tinkered with since the 1965 Higher Education Act is broken.
Unmanageable student loan debt will saddle a generation of students with burdens that will slow or halt them on the path to prosperity. Student loan collectors have supercreditor powers, to garnish wages and seize tax refunds without going to court, to charge collection fees up to 40%, to deny graduates access to transcripts and job licenses, and to keep pursuing debts, zombie-like, even after borrowers go through bankruptcy and discharge other debts. Recent graduates cannot get mortgages to buy homes, even if they are not in default, because their student loan payments are taking such a bite out of their monthly incomes. State legislatures have piled on educational requirements for a variety of entry-level jobs (nurse's aides, child care workers, teachers, etc.) while cutting state funding for public colleges and increasing tuition: unfunded job mandates. Finally, the combination of high debt and the harsh consequences of default are widening the racial wealth and income gaps.
Current reform proposals would make a bad situation worse. For example, it is difficult to see how increasing the percentage of income required for income-based repayment plans will help student borrowers, nor how extending the repayment period before loan retirement would reduce defaults. What is needed instead is to 1) deal with the for-profit school problem, 2) restore the state-level commitment to funding public colleges, 3) fix the broken federal student loan servicer contracting, 4) rethink the collection and bankruptcy regime for student loans and 5) repeal the student loan tax, i.e. the above-cost interest rates college graduates pay to the Treasury. Among other things. More on these themes in later posts.

Wednesday, July 6, 2016

Hillary Clinton proposes a three-month moratorium on student-loan payments and massive loan refinancing: A good idea, but difficult to implement

According to the Washington Post, Hillary Clinton has proposed a three-month moratorium on student-loan payments to allow borrowers time to restructure their student loans at lower interest rates.

Let me say flat out that this is a good idea. As the press has widely reported, about 40 percent of college-loan borrowers who are in the repayment phase of their loans aren't making payments. These people are seeing their loan balances go up as interest accrues on unpaid debt, and they desperately need repayment options they can afford.

In addition, millions of people who are making their loan payments would benefit from repayment plans that would lower monthly payments and take advantage of lower interest rates.

Hillary's proposal underscores this stark fact: The federal student-loan program is in chaos. There are currently eight income-based repayment plans, and even experts are confused about how the different options work and which students are eligible for the various repayment plans. Giving students a three-month hiatus to sort all this out is an excellent idea.

But why is Hillary making this proposal now? Was she prompted by pure politics--making a play for young people's votes? Is her proposal an attempt to win over Bernie Sanders' supporters?

Obviously, Hillary's proposal was driven by political consideration. But I think there is something more going on--namely panic. I think Hillary and the Democratic establishment finally realize that millions of Americans are overwhelmed by unmanageable student-loan debt. These distressed debtors are frustrated, demoralized and angry; and they won't vote for Hillary unless they think she will provide them with tangible relief if she is elected President.

In short, the Democrats see blood in the water; they know they must do something substantive to keep young voters in the Democratic column in the November election.   And even Hillary's fiercest critics must admit that her massive student-loan refinancing proposal is substantive and significant.

Nevertheless, I don't see how Hillary's plan can be effectively implemented. The federal student loan program is like a massive battleship plunging across a raging ocean at full speed--it can't be turned around quickly.  Here are some of the problems:

First, simply determining who is eligible for Hillary's refinancing program will be a huge challenge. More than 40 million Americans have outstanding student loans, and most of them are in the repayment phase.  Just figuring out who is eligible to stop making loan payments and who is not will be an enormous headache.

For example, a lot of borrowers took out private student loans that aren't part of the federal student loan program.  Of course, private loans won't be covered by Hillary's moratorium. But research has shown that many borrowers don't know whether their loans are federal or private, and some have both kinds of loans. If Hillary implements a moratorium, a good many borrowers will stop making payments on their private loans, which will get them in trouble with their lenders.

And 5 million borrowers are already in income-based repayment plans under very favorable terms. Can these people stop making payments for three months? If not, who is going to notify them that they are not eligible to participate in the moratorium?

Second, the Department of Education may not have the capacity to meet the bureaucratic challenge of refinancing millions of loans over a three-month period. There are 43 million people with outstanding student loans, but many borrowers signed multiple promissory notes--perhaps a dozen or more. And some of these documents date back 20, 25, and even 30 years.  

Refinancing all these loans will be a gigantic undertaking, the bureaucratic equivalent of launching Obamacare. I seriously doubt whether DOE or the various creditors have the resources to refinance all these loans over a three-month period. After all, DOE has had great difficulty coping with Corinthian Colleges' former students who sought loan forgiveness in the wake of Corinthian's bankruptcy. 

Third, once college borrowers are given license to stop making payments for a brief period, it will be very difficult to get them back in the repayment mode. In some ways, Hillary's proposal is like the European Union's decision to accept refugees from the Middle East. Once the stream of migrants began moving, the Europeans found themselves unable to handle the volume of refugees that crossed into the EU. And there was no effective way to regulate the flow.

Likewise, Hillary's proposal to allow millions of college borrowers to stop making loan payments while they refinance their student loans will create a massive upheaval in the federal student loan program. If her plan goes forward, I think we will see millions of people stop making loan payments, whether or not they are eligible for Hillary's moratorium. 

Finally, Hillary's student-loan refinancing plan may be nothing more than a way to shove borrowers into 20- and 25-year repayment plans.  The Obama administration has been aggressively pushing college borrowers into long-term income-based repayment plans. It has said it hopes to have nearly 7 million people in IBRPs by the end of 2017.

Hillary's pan will accelerate the movement of student borrowers into long-term repayment plans.  If it is implemented, we will surely see 10 million people or more in IBRPs, which will effectively make them indentured servants to Uncle Sam, paying a percentage of their income to the government for a majority of their working lives just for the privilege of going to college.

As I have said repeatedly, IBRPs are a bad idea and nothing more than a way to keep a lid on the student-loan crisis. It would be very disappointing if Hillary implemented a student-loan refinancing plan that has the primary effect of lengthening the loan repayment period for millions of Americans.

Conclusion: In spite of its drawbacks, Hillary's loan refinancing proposal is a good idea. In spite of all the drawbacks to Hillary's refinancing idea, I hope she goes forward with it if she becomes President. Almost anything is better than the present state of affairs.  Lowering interest rates will give millions of borrowers some relief from their debt. And even if her plan forces more borrowers into IBRPs, that option is better than having them continue to shoulder monthly payments that are so large as to be unmanageable.

Besides, Hillary's scheme, if implemented, will expose the utter chaos of the federal student loan program, which the federal government has hidden from the American people. Once the public realizes how many millions of people are suffering from their participation in the federal student loan program, maybe we will see real reform--which is nothing more and nothing less than reasonable access to the bankruptcy courts. 

References

Anne Gearan and Abby Phillip. Clinton to propose 3-month hiatus for repayment of  student loans. Washington Post, July 5, 2016. Accessible at https://www.washingtonpost.com/news/post-politics/wp/2016/07/05/clinton-to-propose-3-month-hiatus-for-repayment-of-student-loans/?hpid=hp_special-topic-chain_clinton-loans-11pm%3Ahomepage%2Fstory

Josh Mitchell. More than 40% of Student Borrowers Aren't Making Payments. Wall Street Journal, April 7, 2016. Accessible at http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348

Alia Wong. When Loan Forgiveness Isn't Enough. Atlantic Monthly, June 15, 2015. Accessible at http://www.theatlantic.com/education/archive/2015/06/government-corinthian-college-loan-plan-problems/395513/