Showing posts with label Paula Maxine Edwards. Show all posts
Showing posts with label Paula Maxine Edwards. Show all posts

Monday, March 6, 2017

Newman University and Paula Maxine Edwards: Does a college have a moral duty to warn students that some of its programs are not financially worthwhile?

Paula Edwards attended Newman University to become a school teacher. 

Paula Edwards, a single mother with two children, obtained a bachelor's degree in education from Newman University, a small Catholic college located in Wichita, Kansas. Newman's tuition rates are higher than public universities in Kansas, but Edwards chose Newman because she could take most of her classes in the evening while continuing to work as a paralegal.

Edward's education degree qualified her for a job in education, and in the fall of 2016 she was in her fourth year as an elementary school teacher in Wellington, Kansas. Edwards' teaching job does not pay well; she makes only $35,300 a year. Moreover, unless she obtains more education, Edwards' salary will not go up much. In fact, her salary is capped at $35,700--only $400 a year more than she is making now.

Most people who choose the teaching profession are attracted by the intangible rewards of educating children; they realize they will never become rich. Unfortunately, Edwards chose to get her teacher training at an expensive college, and she had to borrow a lot of money to get her degree. In fact, in 2015, when she filed for bankruptcy, Edwards owed $151,000 in student loans.

Obviously, there is no plausible scenario whereby Edwards can pay back $151,000 on a salary of $35,000. In fact, she seems like an ideal candidate for bankruptcy.  But when Edwards filed for bankruptcy in 2015, she was confronted by a major obstacle. Under Section 523(a)(8) of the Bankruptcy Code, debtors cannot discharge their student loans in bankruptcy unless they can show undue hardship. And this is very hard to do.

Remarkably, Edwards won something of a victory in a Kansas bankruptcy court. Although the bankruptcy judge refused to relieve her of $72,000 in federal student loans, the judge did discharge her private student loans--about $58,000.  Essentially, the judge forced Edwards to sign up for an income-driven repayment plan (IDR) for her federal loans with monthly payments set at only $21 a month based on her current salary. If she makes regular payments for 20 years, the balance of her loan will be forgiven.

But here's the problem with  Edwards' IDR--assuming she enrolls in the plan the government offered. Interest is accruing on the $72,000 Edwards owes on her student loans, and $21 a month doesn't begin to pay that interest. All unpaid interest will be capitalized and added to her loan balance.

Given her likely income trajectory as a Kansas school teacher, Edwards will probably owe twice what she borrowed when her 20-year repayment plan comes to an end in 2036.

But it gets worse. The federal government considers a forgiven loan as taxable income. Thus, Edwards could be forced to pay taxes on $150,000 in so-called "income," because that is probably the amount she will owe when her 20-year repayment plan is concluded.

If Edwards were indebted for any reason other than her student loans, she could shed her debts in bankruptcy and get the "fresh start" that bankruptcy is intended to provide. But the "undue hardship" rule in the Bankruptcy Code has probably forced her into a repayment plan that will stretch over the majority of her working life. She will be 56 when her payment obligations stop and she will face a whopping tax bill.

Newman College bears some responsibility for Edwards' plight.

Tuition and fees at Newman amount to almost $28,000 a year; and that does not include books and living expenses. No wonder Edwards owes $151,000 in student loans.

Does Newman University bear any responsibility for what happened to Edwards? I think it does. Surely Newman officials should have warned Edwards that it would not work out for her financially if she borrowed money to get a Newman degree in order to become a school teacher.

Nicholas Eberstadt, writing for zerohedge.com, reported recently that a lot of graduates believe their college studies were not worthwhile. People who graduated in liberal arts or social studies were particularly dissatisfied. In a survey of 1800 graduates, more than two thirds of psychology graduates said their degrees were "not worth it."  And almost half the people who graduated in fine arts, history, geography, and politics expressed the same view.

Eberstadt's report did not include any data for people who graduate in the field of education, but I feel sure a great many people who chose to get education degrees from expensive private colleges regret their decision.  More than 20 years after getting a doctorate in education policy from Harvard, I can assure you that my Harvard experience was extravagantly overpriced.

Eberstadt argues persuasively that the federal government has fueled the demand for postsecondary education by offering students cheap money to go to college. "Loaning these funds at below market interest rates and backing up these risky loans has led to massive malinvestment . . ." Eberstadt wrote.

Eberstadt is right. And Paula Edwards, who borrowed more than $100,000 in good faith to attend an expensive private college in order to become an elementary-school teacher, is just one among millions of casualties of our disastrous federal loan program.

Harvard Graduate School of Education: an elite school for suckers


References

Tyler Durden. The Most (And Least) Worthwhile Degrees. zerohedge.com (March 5, 2017).

Edwards v. Navient Solutions, Inc., 561 B.R. 848 (D. Kan. 2016).



Sunday, March 5, 2017

Edwards v Navient: A single mom's private student loans are discharged in bankruptcy but not her federal loans

Edwards v. Navient Solutions, Inc., decided last November, contains both good news and bad news for distressed student loan debtors.

The good news is this: Paula Maxine Edwards, a single mother of two children, was able to discharge $56,640 in private student loans under the Bankruptcy Code's "undue hardship" standard. Judge Janice Miller Karlin, a Kansas bankruptcy judge, ruled that Edwards had managed her private loans in good faith, in spite of the fact she had made only a few payments on them.

And this is the bad news: Judge Karlin ruled that Edwards could not discharge $72,000 in federal student loans because Edwards was eligible to enter an income-driven repayment plan (IDR) that allowed her to make loan payments based on her income over a 20-year span.  At her current income, Edwards would only be obligated to pay $21 a month. Obviously, this token monthly payment will not cover accruing interest on $72,000, which means Edwards will never pay off her federal loans.

The Edwards case: Another chronicle of student-loan misery

Paula Edwards, age 36, obtained a bachelor's degree in education from Newman University, a small Catholic college located in Wichita, Kansas. Newman University is expensive; currently, tuition and fees total about $28,000 a year. Although Edwards worked as a paralegal while she was in school and took no unnecessary courses, she wound up owing $151,000 in student loans.

Edwards' degree from Newman qualified her for a job as an elementary school teacher. At the time of her bankruptcy proceedings, she was in her fourth year as a teacher, and her annual salary was only $35,300. Unless Edwards obtains more education, which she cannot afford, her salary is capped at $35,700.

Edwards' student-loan debt fell into two categories. First, she borrowed $72,000 in federal student loans, which were eligible for modified payment terms. Second, she took out  private loans totally $56,640 from Navient Solutions. Her private loans contained no provision for modified payment terms and bore interest at the rate of 9.75 percent. (She also borrowed $8,354 from Navient for Stafford loans, which she did not attempt to discharge).

Judge Karlin refused to discharge Edwards' federal loans. The Department of Education represented that Edwards was eligible to participate in the Department's REPAYE program, which allowed her to make payments based on her income over 20 years. At her current salary, DOE told the court, Edwards would only be obligated to make payments of $21 a month.  Edwards admitted she could make payments in this amount, and this debt was not discharged.

Applying the Brunner test, Judge Karlin discharged Edwards' private student loans

However, Judge Karlin discharged Edwards' private loans owed to Navient. The judge noted that private loans, unlike federal loans, contain no provisions for alternative repayment plans such as REPAYE. Applying the three-pronged Brunner test, Judge Karlin concluded that repaying the private loans would be an undue hardship for Edwards.

Judge Karlin ruled that Edwards met the first prong of the Brunner test, which required her to show she could not maintain a minimal standard of living if she were forced to pay back her private loans. Moreover, in Judge Karlin's opinion, Edwards met Brunner's second prong by showing that her financial situation was not likely to improve any time soon. As the judge pointed out, Edwards worked in a low-paying profession, and it was "highly unlikely" that Edwards' salary would increase significantly.

Finally, and perhaps most importantly, Judge Karlin ruled that Edwards met the third prong of the Brunner test, which obligated her to show she had made a good faith effort to repay her student loans. Although Edwards had made no payments on her private student loans over the previous six years, her payment history did not preclude a good faith finding.

As Judge Karlin explained, the Brunner test "requires the Court to determine if the debtor has made a good faith effort to repay the loan as measured by his or her efforts to obtain employment, maximize income and minimize expenses . . . .  A finding of good faith is not precluded by a debtor's failure to make a payment."

In Judge Karlin's view, Edwards had demonstrated "that she was really unable to make anything but a de minimus payment, if at all, on her student loans during the last six years." While it was true, the judge acknowledged, that Edwards had received tax refunds from time to time, good faith was not precluded by the fact that she had used the refunds to meet other pressing financial obligations rather than apply the refunds to her student loans.
[W]hile it would be better for her case had she paid even $10 a month from her tax refunds, in light of her life situation--attempting to raise two children on her own with very little child support, and with a small income even giving her teaching degree--her minimal efforts should qualify under the totality of circumstances. There was no evidence she willfully or negligently caused her own default, and the Court does not believe she did.
Conclusion: A Pyrrhic victory 

Edwards v. Navient Solutions, Inc. is a mixed bag for student-loan debtors. On the positive side, the court interpreted the "good faith" prong of the Brunner test in a sensible way. A debtor's good faith is not determined by the number of loan payments made but rather on whether the debtor made good faith efforts to repay student loans by maximizing income and minimizing expenses. In Judge Karlin's view, Edwards met Brunner's good-faith prong even though she made no payments on her private loans for six years.

Unfortunately, Judge Karlin refused to discharge Edwards' federal student loans due at least partly to the fact that Edwards was eligible to participate in REPAYE, which allows Edwards to make minimal payments of only $21 a month based on her current income. Since monthly payments of $21 won't cover accruing interest, Edwards' federal loans will negatively amortize--her debt will grow larger with each passing year.

Other courts have rejected creditors' arguments that college debtors should be forced into income-driven repayment plans as an alternative to bankruptcy relief. In the Abney case, the Lamento case and the Halverson case, courts explicitly recognized the psychological stress a long-term repayment plan can put on a debtor.

Paula Edwards won a Pyrrhic victory in a Kansas bankruptcy court. She shed $58,000 in private student-loan debt, but she was forced into a long-term repayment plan for her federal loans that will require her to make token payments for 20 years. Given Edwards' likely income trajectory, she will undoubtedly owe double the amount she borrowed at the end of the 20 year payment term--not a just outcome for a single mother of two who made a good faith effort to pay off her student loans.

References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Edwards v. Navient Solutions, Inc., 561 B.R. 848 (Bankr. D. Kansas 2016).

Halverson v. U.S. Department of Education, 401 B.R. 378 (Bankr. D. Minn. 2009).

Lamento v. U.S. Department of Education, 520 B.R. 667 (Bankr. N.D. Ohio 2014).