Showing posts with label Parent PLUS. Show all posts
Showing posts with label Parent PLUS. Show all posts

Saturday, March 9, 2019

Misinformation: Some commentators inaccurately say that student loans cannot be discharged in bankruptcy

Last month, Mises Institute, an Austrian think tank, posted an interesting article on the American student-loan crisis. For the most part, the article contains interesting and accurate information; but it also said student loans cannot be discharged in bankruptcy--which is not true.

The Mises Institute article focuses on student-loan debt owed by older Americans, As author Andrew Moran explained, these debts fall into two categories: student loans that seniors take out to finance their own education and Parent PLUS loans, which are loans older Americans take out for their children's postsecondary studies.

"It is the Parent PLUS program that seems to be wreaking the most havoc on older Americans," Moran wrote. These loans are marketed to parents of college students and carry a fixed interest rate of 7.67 percent plus an origination fee equal to 4.2 percent of the loan. As Moran noted, there is no cap on the amount of money parents can borrow through Parent PLUS.

American seniors who fall behind on their student-loan payments face serious consequences. As Moran reported, the federal government can seize income-tax refunds from senior Americans who default on their student loans (either their own loans or the loans they took out for their children). The feds can also garnish Social Security checks. True enough.

Moran then went on to state that student-loan debt cannot be discharged in bankruptcy. But this is not accurate. The Bankruptcy Code states that students  cannot be discharged unless the debtor can show that paying the loans would create an "undue hardship."

It is true that discharging student loans in bankruptcy is very difficult, and the Department of Education or its agents oppose bankruptcy relief in almost every instance. But in recent years, bankruptcy judges have discharged student-loan debt in a number of cases.

For example, in the Abney case, a Missouri bankruptcy judge discharged student loans owed by a man in his 40s who was living near the poverty line and had actually slept in his employer's truck for a time. In the Lamento case, an Ohio judge discharged student loans owed by a 35-year-old, single mother with two children who had taken out loans to get a college degree she had been unable to obtain.

In Kansas, a bankruptcy judge discharged accumulated interest on student loans owed by a married couple in their late 40s, and the decision was upheld on appeal. Later, a second Kansas bankruptcy judge forgave accumulated interest on student loans owed by V icky Jo Metz, a 59-year-old woman who had taken out student loans in the 1990s to attend a community college.

One might argue that isolated decisions by compassionate bankruptcy judges are anomalies, and that the common belief that student loans are nondischargeable is overall still true. But several federal appellate courts have expressed sympathy for distressed student-loan debtors. The Roth decision by the Ninth Circuit Bankruptcy Appellate Court, the Krieger ruling out of the Seventh Circuit, the Fern case from the Eighth Circuit Bankruptcy Appellate Court, and the Tenth Circuit's Polleys decision all approved bankruptcy relief for overburdened student debtors.

I do not wish to criticize Mr. Moran for the error in his Mises article. The Department of Education has done nothing to dispel the myth that student loans are nondischargeable; and in fact DOE has uniformly opposed bankruptcy relief, even for people in desperate circumstances. In the Myhre case, for example, DOE opposed bankruptcy relief for a quadriplegic who was gainfully employed but not making enough money to pay for the full-time care he needed to feed and dress himself.

And a pattern has emerged for student-loan creditors to assign student loans to Educational Credit Management Corporation, who often steps in to oppose bankruptcy relief after the debtor files for relief. Why? I think it is become ECMC, with its network of lawyers and ample resources for paying attorneys, has become the Department of Education's hired thug to beat down destitute student-loan debtors, who often come to court without attorneys.

So keep reporting on the student-loan crisis, Mr. Moran. You are doing good work. And don't feel bad about the error in the Mises article. The myth that student loans are nondischargeable in bankruptcy has been circulated many times by experts, even by attorneys who should know better.









Sunday, February 10, 2019

Senator Elizabeth Warren can survive Cherokee-Gate if she focuses on student-loan crisis

To my surprise, Senator Elizabeth Warren officially announced she is running for President, her head "bloodied but unbowed" by the scandal about her ethnic heritage, which I will call Cherokee-Gate.

Warren is a U.S. Senator from Massachusetts, which is remarkably tolerant of screw ups. Senator Ted Kennedy's political career survived Chappaquiddick (although Mary Jo Kopechne did not). Congressman Barney Frank continued serving in Congress after he admitted hiring a male prostitute as a personal aide. Representative Gerry Studds was elected to Congress six more times after he was censored by the House of Representatives for having a sexual relationship with a 17-year old page (the vote was 420 to 3). In fact, Studds' constituents on Martha's Vineyard gave him a standing ovation after his sex scandal broke.

So Liz came take comfort from the fact that Massachusetts probably doesn't give a damn whether she advanced her career by calling herself an American Indian. The Bay State likes to send moral reprobates to Washington DC.

But playing footsie with one's race to get ahead in the Ivy League won't play well in the Rust Belt, where the children of unemployed steel workers lack the temerity to call themselves Chippewas in order to get a college scholarship.

Thus, if Warren's presidential bid is to have legs, she needs to develop a substantive campaign platform to distract potential voters--and she needs to do it fast. How about focusing on the student-loan crisis?

Senator Kamala Harris stole a march on Warren when she came out for free college, so Liz has got to think of something sexier regarding the student-loan fiasco.  Here are some suggestions, which I hope she will embrace:

1) Legislation barring the federal government from garnishing Social Security checks of elderly student-loan defaulters, a proposal that Senator Warren and Senator Claire McCaskill proposed a few years ago.  That's a no-brainer, in my view.

2) Amending federal law to stop the IRS from treating forgiven student-loans as taxable income. Who could argue against that?

3) Capping accrued interest, penalties and refinancing fees on student loans to no more than 50 percent of the original amount borrowed. Currently, we see college borrowers whose student-loan balances have ballooned to three or four times the original loan amount. Surely that' a reasonable proposal.

4) Revising the Bankruptcy Code to allow distressed student-loan debtors to discharge their student loans in bankruptcy like any other unsecured consumer debt. Or if that lift is too heavy, at least let borrowers discharge their private student loans in bankruptcy.

5) Allowing parents to discharge their Parent Plus loans in bankruptcy if they run into financial trouble and can't pay off the loans they took out for their children's college education.

I admit I hold a grudge against Senator Warren for her Cherokee scam. After all, I grew up in Anadarko, Oklahoma; and it never occurred to me to call myself a a Nadarko Indian. Just like Liz, I've got a law degree; and Liz's eyes are bluer than mine.  If I'd played my cards right, I too might have become a Harvard law professor.  I might have been Harvard Law School's first cisgendered person of color!

But all will be forgiven as far as I'm concerned if Senator Warren will only endorse some of the proposals I've listed. And if she would do that, I think she might do very well in the Iowa caucuses.



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.






Tuesday, May 15, 2018

Parent PLUS loans: African American families are being exploited by HBCUs

Rachel Fishman wrote a report for New America titled "The Wealth Gap PLUS Debt: How Federal Loans Exacerbate Inequality for Black Families."   But a better titled would have been this: "The Parent PLUS student-loan program screws African American families."

Parent PLUS is a federal student loan program that allows parents to take out student loans for their children's postsecondary education. Parents can borrow up to the student's total cost of attending the college of their choice--there is no dollar cap on the amount that parents can borrow.

Originally, the Parent PLUS program had very low eligibility criteria, and the Department of Education was making loans to parents who had a history of bad debts. DOE tightened the criteria in 2011, which raised an outcry from HBCUs (Historically Black Colleges and Universities).

HBCUs favor Parent PLUS loans because DOE does not report default rates on these loans and does not penalizes colleges for high Parent PLUS default rates.  As Fishman explained, "Parent PLUS loans are not included in CDR [cohort default rate] calculations, rendering them a no-strings-attached revenue source for colleges and universities" (P. 9). Indeed, for many colleges, "Parent PLUS loans are like grants; they get money from the federal government and the parent is on the hook to repay."

In response to strenuous protests from HBCUs, the Obama administration backed off on its efforts to make borrowing standards more rigorous, and the amount of money parents borrow under the program has increased.  According to Fishman, the percent of Parent PLUS borrowers with debt over $50,000 increased from 3 percent in 2000 to 13 percent in 2014 (p. 19).

Basically, the Department of Education is toadying to the HBCUs by loaning money recklessly to African American families that probably can't pay it back. In fact, Fishman reported that one third of African American parents taking out PLUS loans had incomes so low they were able to make zero estimated family contributions (EFC) to their children's college costs.

As Fishman points out, Parent PLUS loans adds to  a family's total debt for putting a child through college. Black families with zero EFC accumulate an average of $33,721 in "intergenerational indebtedness," which includes an average of $11,000 in PLUS loans in addition to the amount borrowed by the students themselves.

Fishman's report adds to a growing body of evidence showing that African Americans are getting screwed by the federal student loan program. Ben Miller, writing for the Center for American Progress (as reported by Fishman) "found that 12 years after entering college, the median Black borrower owed more than the original amount borrowed."  And default rates for African American college graduates is almost triple the rate for white graduates: 25 percent for black graduates and only 9 percent for white graduates.

A Brookings Institution report also calculates high default rates for black student borrowers. Judith Scott's Brookings report estimates that 70 percent of African American borrowers in the  2003-2004 cohort will ultimately default.

And the student-loan default rate for African Americans who drop out of for-profit schools without graduating is catastrophic.  Three out of four black students who borrow money to attend a for-profit institution and drop out before graduating default on their student loans.

But who gives a damn if the federal student loan program screws African American students and their families? HBCUs like the Parent PLUS program, because the Parent PLUS default rate doesn't penalize the colleges.  Parent PLUS money is essentially "free money" to a HBCU although one third of African American families who take out these loans show zero ability to repay.

References

Rachel Fishman. The Wealth Gap PLUS. How Federal Loans Exacerbate Inequality of Black Families. New America.org, May 2018.

Andrew Kreighbaum. How Parent Plus Worsens the Racial Wealth Gap. Inside Higher Ed, May 15, 2018.