Savage v Educational Credit Management Corp.: How $37,000 in student loans ballooned into a $250,000 debt

Paul Savage took out $37,000 in student loans to get a degree in human resources management from Temple University, which he obtained in 1997. Later that year, he consolidated the loans at an 8 percent interest rate, but he never made a single payment on the debt. 

Twenty-five years later, Savage tried to discharge his student loan debt in a Georgia bankruptcy court. By this time, his outstanding loan balance had ballooned to approximately $250,000.

Educational Credit Management Corporation, perhaps the U.S. Department of Education's most ruthless debt collector, opposed Savage's attempt to discharge his massive student loan obligation. It argued that Savage was eligible for REPAYE, a 20-year income-based repayment plan. Based on his low income, Savage's required monthly loan payment would be zero.

Furthermore, ECMC argued that Savage failed to make a good-faith effort to repay his debt, which barred him from bankruptcy relief.

Bankruptcy Judge Sage Sigler rejected ECMC's arguments and discharged Mr. Savage's student debt. Judge Sigler's reasoning was as follows:

First, the judge ruled that Savage had managed his loans in good faith. Although he failed to make any payments for over 25 years, Savage had either been enrolled in an income-based repayment plan or a government-approved deferment program and had never been in default. In addition. Savage had made good faith efforts to maximize his income, despite his average annual earnings over the years being only $14,000.

At the time of his bankruptcy filing, Savage was 57 years old. If he were forced into a 20-year income-based repayment plan that required him to make no payments, interest would accrue over the next two decades, increasing his total student loan debt to $1 million.

In short, Judge Sigler ruled that repaying his student loans would impose an undue hardship on Mr. Savage, and thus, he was entitled to bankruptcy relief.

Implications

Paul Savage was fortunate to have Judge Sigler presiding over his bankruptcy case. Many bankruptcy judges have refused to discharge student loan debt, even in cases with facts more dire than those presented by Savage.

ECMC has repeatedly argued that student loan borrowers who qualify for income-based repayment plans are ineligible for bankruptcy relief if their monthly payments are de minimis. Fortunately, many bankruptcy judges have begun to reject that argument for the same reasons Judge Sigler did.

It's nuts for the federal government, acting through private debt collectors, to oppose student-loan bankruptcy relief for people like Paul Savage. Democratic politicians seeking ways to support their young constituents should advocate for legislation that affords bankruptcy relief to overburdened debtors who have handled their student loans in good faith.

 Congress hasn't acted because many congressional legislators view the higher education industry as their core constituency, not college students. The higher education industry is content with the status quo, which allows colleges to charge outrageous tuition prices, knowing that students and their parents will borrow the money to pay the bill.

Bankruptcy Judge Sage Siegler

Hill v. ECMC: An Army veteran with PTSD sheds her student loans in bankruptcy

Hill v. ECMC: A veteran seeks to discharge her student loans in bankruptcy

Risa Rozella Hill enrolled at Wichita State University after getting out of the Army, and she obtained a bachelor's degree in social work in 2002. She went on to pursue a master's degree from Newman College but did not graduate. In 2008, she received an MBA from DeVry University.

Hill financed her studies with 23 student loans totally $127,000. She never paid anything on these loans, but she was never in default because she obtained various deferments or forbearances that entitled her to skip her loan payments.

In 2013, Hill began to experience symptoms of psychosis, including delusions, hallucinations, and voices that "instructed her to behave in certain ways." In 2014, she was involuntarily committed to psychiatric care in a Georgia hospital. She was diagnosed with bipolar disorder and post-traumatic stress disorder (PTSD).

Hill was released from the hospital, but she was readmitted to another hospital a few months later after showing signs of psychosis. She was released again in November 2014.

Prior to filing for bankruptcy, Hill experienced periods of homelessness. The Social Security Administration deemed her disabled and she began receiving disability-benefit checks--her sole source of income. She also began living in publicly subsidized housing.

In 2017, Hill filed for bankruptcy and sought to have her student loans discharged. Hill was represented by the Atlanta Legal Aid Society. Educational Credit Management entered the litigation as the sole defendant.

Judge Sage Sigler discharges Hill's student loans over ECMC's objections

In evaluating Hill's claim, Judge Sage Sigler applied the three-pronged Brunner test to determine whether repaying the loans would constitute an "undue hardship" under 11 U.S.C. § 523 of the Bankruptcy Code. In Judge Sigler's opinion, Hill's disability income was hardly adequate to meet her basic needs.  Hill could not maintain a minimal lifestyle if she were forced to pay back her student loans, Judge Sigler concluded; and thus, Hill satisfied the first prong of the Brunner test.

Moreover, Judge Sigler continued, Hill's financial circumstances were unlikely to improve during the loan repayment period. "[T]he weight of the evidence demonstrates that [Hill's] condition will persist indefinitely," Judge Sigler observed; and any recovery from Hill's bipolar disorder was "purely speculative." Indeed, Judge Sigler wrote, "The prospect of [Hill] obtaining and maintaining employment commensurate with her prior jobs is unfortunately hopeless." In short, Hill met part two of the Brunner test.

Part Three of the Brunner test required Hill to show that she had handled her student loans in good faith.  Again, Judge Sigler ruled in Hill's favor. Hill met the good faith standard in spite of the fact she had not made a single loan payment.

Judge Sigler pointed out that Hill took the steps necessary to obtain deferments or forbearances, which the judge evidently viewed as a sign of good faith. Moreover, the judge noted, "Good faith effort only requires the debtor to have made payments when she was in a position to make such payments. [Hill] was never in such a position."

Implications

In some ways, the Hill decision is unremarkable. Hill's mental illness (psychosis and PTSD) clearly qualified her for a student-loan discharge. What is remarkable is the fact that ECMC opposed it. ECMC dragged out its shopworn tactic of demanding that Hill sign up for REPAYE, a long-term income-based repayment plan--a plan that would have required her to make monthly payments of zero dollars due to her low income.

But Judge Sigler did not buy that line. ECMC's calculation of Hill's loan payments under REPAYE demonstrated that Hill had no discretionary income to dedicate to student-loan repayment. "The very reason [Hill's] payment amount would be zero-dollars a month under REPAYE is because she cannot afford to make payments under her student loans and maintain a minimal standard of living."

The Hill case is probably most significant as another case in which a bankruptcy judge refused to adopt ECMC's tiresome argument that all student-loan debtors should be placed in income-based repayment plans as an alternative to bankruptcy relief.  Judge Sigler identified the fundamental flaw in ECMC's argument, which is this: Debtors so destitute that they are required to make zero-dollar payments on their student loans clearly meet the first criterion for student-loan relief under Brunner. They cannot maintain a minimal lifestyle and pay off their student loans.