Showing posts with label REPAYE. Show all posts
Showing posts with label REPAYE. Show all posts

Wednesday, August 11, 2021

Insanity 101: Medical Doctor with $650,000 in Student Debt Will Pay $80 a Month Under Income-Based Repayment Plan

Tamara Parvizi, age 51, sought to discharge $653,743 in student-loan debt in a Massachusetts bankruptcy court. That's a lot of debt--just shy of two-thirds of a million dollars. 

For 15 years, Parvizi took out student loans to pursue several degrees, and she became fluent in at least four languages. Nevertheless, Parvizi never made a single payment on her student debt other than offsets to her income tax refunds--which totaled less than $4,000 (Parvizi v. U.S Department of Education, slip opinion, p. 4).

Parvizi obtained a bachelor's degree from Clark University in 1990. In 1991, she enrolled in medical school at the University of Rochester but dropped out in 1995 without getting a degree.

Later, Parvizi enrolled at the University of Massachusetts, where she received a master's degree in public health.

In 2006, Parvizi made a second attempt to become a medical doctor. She enrolled at St. George's University School of Medicine, located on the Caribbean island of Grenada.  This time, she completed the program and graduated with a medical degree in 2012.

After obtaining her M.D. degree, Parvizi began a psychiatric residency at the University of Vermont, which she did not complete. She left the residency program in 2013 after being put on a remediation plan (p. 2).

At the time of her adversary proceeding, Parvizi owed $478,000 in unpaid principal on her student loans plus $175,000 in interest. Her annual income was less than $29,000.

The Department of Education opposed Parvezi's request for bankruptcy relief. DOE argued that Parvezi was qualified for REPAYE, an income-based repayment program that would only require her to pay $80 a month over 25 years (based on her current income).

But Parvizi was unwilling to sign up for REPAYE, testifying that she had "suffered enough." She placed most of the blame for her financial predicament on personnel at the University of Vermont. "[W]hy should I pay for the mistakes of a residency program director whose behavior cost me my life, my pursuit of happiness," she asked (p. 4).

Based on Parvizi's eligibility for the REPAYE plan, Judge Elizabeth Katz denied Parvizi's request to discharge her student loans. However, the judge ruled that she would discharge any student-loan debt Parvizi might owe after completing a REPAYE plan.

Who would quarrel with Judge Katz's decision? It is hard to sympathize with a woman who ran up almost half a million dollars in student debt to get a master's degree and a medical degree and who never made a single voluntary payment on her student loans.

On the other hand, I have great sympathy for Dr. Tamara, who undoubtedly did her best to get an education and build a satisfying career. And she may well have been right when she argued that her financial predicament was mainly due to people who made unfair decisions while in her residency program.

Nevertheless, Tamara Parvizi's case demonstrates the insanity of the federal student loan program. Why is the federal government loaning money to a person who left one medical school program without a degree and then pursued another program at a medical school outside the United States?

And what is the point of requiring Dr. Parvizi to pay $80 a month for 25 years while interest on her student loans continues to accrue--probably at a rate of at least $30,000 a year?

This is crazy. And who benefits from all the money the federal government loaned Tamara Parvizi? I suspect the primary beneficiaries are the people who own a private medical school in the Caribbean.

References

Parvizi v. U.S. Department of Education, Adversary Proceeding No. 19-3003 (Bankr. D. Mass. May 13, 2021).



St. George's University School of Medicine: A "Second-Chance Med School"




Tuesday, March 23, 2021

"This student loan case fits the definition of insanity": Bankruptcy judge grants 56-year-old Kansan partial relief from his student-loan debt

 In Goodvin v. Educational Credit Management Corporation, Judge Dale Somers, a Kansas bankruptcy judge, began his opinion with these words:  "This student loan case fits the definition of insanity."

Judge Somers went on to chronicle the story of Jeffrey Goodvin. 

Mr. Goodvin attended Wichita State University for four years (1982-1986) but did not obtain a degree. He enrolled at Brooks Institute of Photography in 1987 and got a bachelor's degree in fine arts in 1990. In 2007, he enrolled at Santa Barbara City College and obtained a certificate in multimedia studies. 

Goodvin made repeated attempts to find steady employment over many years, but he worked in an unstable industry.  Judge Somers summarized Mr. Goodvin's job history as being "marked by several relocations, intermittent job loss, layoffs, and periods of unemployment, through no apparent fault of his own." In 2018, Goodvin entered an apprentice program with the Plumbers and Pipefitters Union. 

By the time Goodvin filed for bankruptcy in 2019, he was 56 years old, and he owed $77,000 in student loans. Educational Credit Management Corporation (ECMC) held Goodvin's largest loan, a consolidated loan that Goodvin took out in 1992. 

And here is where Judge Somers found insanity. The principal of Goodvin's consolidated loan was only $12,077, and Goodvin had paid $19,527 on that loan--more than 150 percent of the amount that was disbursed. But interest on that loan accrued at 9 percent. By the time Mr. Goodvin filed for bankruptcy, he owed $49,000 on that $12,000 loan. 

Predictably, ECMC argued that Mr. Goodvin should be placed in the Department of Education's REPAYE plan, a 20-year income-based repayment plan that would end when he was 76 years old. ECMC did not contend, however, that Goodvin would ever pay off his student loans. In fact, Judge Somers noted dryly, "To argue otherwise would strain incredulity."

Naturally, Mr. Goodvin did not want to enroll in a repayment program that would not end until he was ten years into retirement. Moreover, as Judge Somers pointed out, Goodvin's payments under a REPAYE plan would not cover accruing interest. As Judge Somers observed, "Goodvin's reluctance to participate in the REPAYE plan for another twenty years is not a lack of good faith; it's called hopelessness."

Very sensibly, Judge Somers granted Mr. Goodvin partial relief from his student debt. The judge discharged the consolidated loan, which he described as "the elephant in the room."  That loan, accruing interest at 9 percent, amounted to 64 percent of Goodvin's total student-loan indebtedness. 

That leaves Mr. Goodvin with an obligation to pay back $27,689, an amount that he can probably manage.

Judge Somers' sensible and refreshing decision is a sign that the federal bankruptcy courts are recognizing the enormity of the student-loan crisis.  ECMC appealed to the U.S. district court, but Judge John Lungstrum upheld  Judge Somers' ruling.

This is the third bankruptcy court decision out of Kansas in recent years to grant a partial discharge of student loans. ECMC was a defendant in all three cases, and it appealed all three decisions. Remarkably, federal district courts, acting in their appellate capacity, upheld the bankruptcy judge in all three matters.

Judge Somers was right: The Goodvin case fits the definition of insanity. His decision, thank God, restores some sanity to Mr. Goodvin's life, which should hearten us all.


References

Goodvin v. Educ. Credit Mgmt. Corp., Case No. 19-10623, Adv. No. 19-3105, 2020 WL 6821867 (Bank. D. Kan. Sept. 9, 2020), aff'd, Educ. Credit Mgmt. Corp. v. Goodvin, Case No. 20-cv-147-JWL (D. Kan. March 17, 2021).





Wednesday, August 28, 2019

“A noose around her economic neck”: A young lawyer wins a partial discharge of her private student loans

Nitcher v. National Collegiate Student Loan Trust, decided a few days ago, is another story of a heavily indebted lawyer who attempted to have her student loans discharged in bankruptcy. 

Leslie Taiko Nitcher is a 38-year-old attorney who graduated from Willamette University School of Law and passed the Oregon State Bar in 2008. She found it difficult to find steady work, but she finally landed a law job that paid her $69,000 in 2018.

Nitcher took out federal student loans and private student loans while she was in school. Although she made some payments on her student-loan debt, she owed a quarter of a million dollars on her loans ten years after she graduated. About $200,000 of that debt consisted of federal student loans, which she managed by enrolling in an income-based repayment plan (REPAYE). She pays $479 a month under that plan, which obligates her to make monthly payments for 25 years.

Nitcher also owed $51,000 in private student loans and she attempted to discharge these loans in bankruptcy. Bankruptcy Judge Peter C. McKittrick was sympathetic to her plight and granted Nitcher a partial discharge that requires her to pay only $16,500 on that debt, payable in 110 monthly payments.

Here is how Judge McKittrick began his opinion :
This adversary proceeding tells a far too common story of the plight of a professional swallowed by massive student loan debt, much of which she has no hope of repaying during her lifetime. In 2005, when Leslie Nitcher . . . enrolled in law school, it was with the hope and expectation her advanced degree would lead to a legal career at a level of compensation commensurate with the standard of living that lawyers historically have enjoyed. Instead, she faced a bleak job market when she graduated from law school in 2008. 
The question before the court, Judge McKittrick wrote, was "to what extent her student loan debt will remain a noose around her economic neck for the remainder of her economically productive years."

Judge McKittrick finished his opinion by explaining why he ruled as he did. "The reason I have concluded that the Student Loans should be discharged is largely because Nitcher cannot survive if [her private-loan creditor] garnishes her wages." 

The Nitcher decision is important because it is one of a growing number of bankruptcy-court decisions in which judges acknowledge the heavy burden that many law graduates face due to the tremendous amount of student-loan debt they accumulate during their studies. In many instances, they simply cannot pay it back.

As Judge McKittrick put the matter, Nitcher had “a noose around her economic neck." Unfortunately, Nitcher is still obligated to make monthly payments of $479 a month under REPAYE, which will not terminate until she is in her 60s. Thus, Judge McKittrick loosened the noose around Ms. Nitcher's neck, but she will continue standing on the scaffold for the next quarter of a century.

References

Nitcher v. National Collegiate Student Loan Trust, Bankr. Casse No. 18-31729-pem7 (August 23, 2019).




Monday, July 1, 2019

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.


Tuesday, May 21, 2019

Brookings Institution researcher criticizes federal student-loan program: "It is an outrage"

Last month, Adam Looney of the Brookings Institution released a paper that is chock full of ideas for fixing the federal student-loan program. Looney began his paper with a withering condemnation of the program in its present form, which he accurately described as an outrage. I am quoting his critique verbatim, just putting his words into a bullet-style format:
  • "It is an outrage that the federal government offers loans to students at low-quality institutions even when we know those schools don't boost their earnings and that those borrowers won't be able to repay their loans."
  • It is an outrage that we make parent PLUS loans to the poorest families when we know they almost surely will default and have their wages and social security benefits garnished and their tax refunds confiscated . . ."
  • "It is an outrage that we saddled several million students with loans to enroll in untested online programs, that seem to have offered no labor market value."
  • It is an outrage that our lending programs encourage schools like USC to charge $107,484 . . . for a master's degree in social work (220 percent more than the equivalent course at UCLA) in a field where the median wage is $47,980."
All these failures, Looney charges, "are entirely the result of federal government policies." 

Nevertheless, for all its faults, Looney thinks the federal student loan program is worth fixing, and he makes several interesting reform proposals:

First, Looney recommends a cap on loans to graduate students. Currently, graduate students in the Grad PLUS program can take out student loans to pay the entire cost of their studies, no matter what the cost, which is nuts. 

This "sky is the limit" loan policy has led to the escalating cost of getting an MBA or law degree. In fact, the American Bar Association estimates that the average student at a private law school takes out  $122,000 in student loans. 

Second, Looney recommends applying an "ability-to-pay" standard to parent loans or eliminating them altogether. In my view, the Parent PLUS program should be shut down. It is insane to lure parents into financing their children's college education by taking on massive student-loan debt--debt which is almost impossible to discharge in bankruptcy.

Third, Looney recommends the REPAYE program as the default student-loan repayment plan for all students. Unless a student opts out, all student-loan borrowers would be automatically enrolled in the REPAYE program when they begin repaying their student loans.

REPAYE, introduced by the Obama administration, allows student debtors to pay 10 percent of the discretionary income (income minus 150 percent of the poverty level) for 20 years rather than attempt to pay off their loans in the standard 10-year repayment plan.

In conjunction with automatic REPAY enrollment, Looney calls for voiding all fees, capitalized interest, and collection costs on current borrowers--costs and fees they wouldn't have suffered if they had been automatically enrolled in REPAYE. In addition, he proposes to cancel all student-loan debt that is 20 years old or older--without regard to the status of these loans.

Finally, Looney calls for a halt in wage and Social Security garnishment, and an end to the Treasury Offset program--the program that allows the government to capture defaulted borrowers' tax refunds.

These are all good proposals, but I have reservations. First, is it good public policy to automatically enroll all student-loan debtors in REPAYE--a 20-year income-based repayment plan? If we go that route, we will be creating a massive class of indentured servants who will be paying a percentage of their income to the government for the majority of their working lives.

Moreover, most people in those plans will never pay back the principal on their loans and could wind up with huge amounts of forgiven debt after 20 years, which would be taxable to them as income.

Secondly, Looney's proposals--all good, as I have said--are complicated, and the Department of Education has a dismal record managing just about every aspect of the student-loan program. For example, individuals enrolled in the Public Service Loan Forgiveness program have been applying for debt relief, and the Department of Education has rejected 99 percent of all claims.

So these are my revisions to Mr. Looney's proposals:
  • Amend the Bankruptcy Code to allow distressed student-loan debtors to discharge their student loans in bankruptcy like any other consumer debt.
  • Shut down the Parent PLUS program immediately, and allow parents who took out Parent PLUS loans or cosigned private loans for their children to discharge those loans in bankruptcy.
  • Finally (and this is basically Mr. Looney's proposal) wipe out all penalties, fees, and capitalized interest for all 45 million student-loan borrowers and stop garnishing wages, tax refunds, and Social Security checks of student debtors in default.
My proposals, Mr. Looney's proposals, and for that matter, Senator Warren's debt-forgiveness proposal are shockingly expensive. Any policy that grants student-loan forgiveness to the millions of people who deserve it will cost billions--a quarter of a trillion dollars perhaps or even more.

But let's face facts. Millions of student borrowers are not paying back their loans under the present system. Indeed, Secretary of Education Betsy DeVos acknowledged last November that only one debtor out of four is paying down principal and interest on student loans.

Let's admit that the student-loan program is a catastrophe, grant relief to its victims, and design a system of higher education that is not so hideously expensive.

Image credit: Quora.com


References

Adam Looney. A better way to provide relief to student loan borrowers. Brookings Institution, April 30, 2019.






Tuesday, February 6, 2018

Loan-Forgiveness and Income-Driven Repayment Plans Are Costing Taxpayers a Bundle of Money

The Department of Education's Office of Inspector General (OIG)issued another one of those mealy-mouth reports we've come to expect from the Department. In essence, the OIG told us something we already knew: DOE's income-driven repayment plans (IDRs) and debt forgiveness plans are costing taxpayers billions of dollars.

For several years now, the higher education community has touted income-driven repayment plans as the panacea for the rising  cost of going to college.  Back during the 2016 presidential campaign, Catharine Hill, president of Vassar College, wrote an op ed essay for the New York Times attacking Senator Bernie Sander's proposal to allow people to go to college for free.  Free college is not the answer, Hill argued. Rather we need to expand income-driven repayment programs.

Indeed, DOE has expanded income-driven repayment options. President Obama's administration rolled out the PAYE and REPAYE, programs that allow student borrowers to pay 10 percent of their adjusted income for 20 years in lieu of the standard 10-year repayment plan. Borrowers who make regular payments for 20 years will have their loan balances forgiven.

As outlined by OIG, the Department of Education offers six income-driven repayment plans and two loan forgiveness plans. Of course, all the student loans under these plans accrue interest. Even an idiot knows that borrowers who makes loan payments that aren't large enough to pay accruing interest will never pay off their loans.

So it shouldn't surprise anyone that DOE's flexible spending plans and loan forgiveness plans are costing the taxpayers billions of dollars because the government is loaning people more money than they will ever repay.

As the OIG reported, DOE's loan balance for income-driven repayment plans increased from $7.1 billion to $51.5 billion between 2011 and 2015. That's an increase of 625 percent in just four years.

Meanwhile, government subsidies for income-driven repayment plans ballooned from $1.4 billion to $11.5 billion over the same four years--an increase of more than 800 percent.

Why did our government create these insane flexible repayment plans?  I can think of one primary reason.

IDRs allow DOE to maintain the fiction that the vast majority of college borrowers are paying back their loans. For most of the people in these plans, an IDR is the only alternative to default. In fact, DOE has encouraged college-loan defaulters and people in danger of default to sign up for IDRs.

But most people in income-driven repayment plans are not paying off their loans because their payments aren't large enough to cover accrued interest. Thus, while IDR participants are not officially in default, they are only making token payments on loans they will never pay off.

What is the OIG's advice to DOE about how to handle the enormous cost of its income-driven repayment plans and its loan forgiveness programs? Here is OIG's gobbledygook recommendation:
We recommend that the Department enhance its communications regarding cost information related to the Federal student loan program's IDR plans and loan forgiveness plans to make it more informative to decision makers and the public.
That's right: All OIG can think of to recommend is more transparency!

As the Wall Street Journal reported about 20 months ago, 43 percent of college borrowers--approximately 9.6 million people--weren't making loan payments as of January 1, 2016. Some of these borrowers were in default, some had delinquent loans and some had loans in forbearance or deferment.

And thanks to DOE's income-driven repayment plans, an additional six million people are making payments too small to pay off their loans.

It is time for DOE to be more than transparent. It needs to admit that about half the people who took out student loans will never pay them back. Thus, of the $1.4 trillion in outstanding student loans, more than half of it will never be collected.



References

Paul Fain. Costs Mount for Federal Loan Programs. Inside Higher Ed, February 5, 2018.

Catharine Hill. Free Tuition Is Not the AnswerNew York Times, November 30, 2015, p. A23.

Josh Mitchell. More Than 40% of Student Borrowers Aren't Making Payments. Wall Street Journal, April 7, 2016.

U.S. Department of Education Office of Inspector General (2018, January 31). The Department's Communication Regarding the Costs of Income-Driven Repayment Plans and Loan Forgiveness Programs. ED-OIG/A09Q0003. Washington DC: Author

U.S. Government Accountability Office (2016 December). Federal Student Loans: Education Needs to Improve Its Income Driven Repayment Plan Budget Estimates. Washington DC: Author.


Saturday, December 9, 2017

It's official: The Republicans hate student-loan debtors

A few days ago, Republicans introduced their bill for revising the Higher Education Act. Some provisions in the GOP proposal are astonishing in their cruelty and contempt for student debtors.
  • Abolishing income-drive repayment plans. For starters, the Republicans want to end all student-loan forgiveness. Goodbye PAYE. Goodbye REPAY. Students who can't pay off their loans under the standard 10-year repayment plan will be forced into income-driven repayment plans that continue until their loans are paid off--which for many of them will be never.
  • Abolishing the Public Service Loan Forgiveness Program. The GOP wants to abolish the Public Service Loan Forgiveness Program, which Congress created in 2007. Hundreds of thousands of students have entered into public-service jobs expecting to have their college loans forgiven after 10 years. If the Republican proposal becomes law, some of these people may be grandfathered into the PSLF program, but the program will be shut down.
  • Forbidding states from enforcing consumer protection laws against student loan servicers. Buried on page 464 of the GOP's bill is a provision that forbids states from regulating the student-loan serving companies.  Some state AGs have vigorously pursued wrongdoers in the loan servicing business, and Republicans apparently want to shield the debt collectors from state consumer protection laws.
Where are these pernicious Republican ideas coming from? Representative Virginia Foxx (R-NC) is Chair of the House Education Committee, and she supports all these nasty proposals. But Foxx is not pulling the strings. These toxic proposals are coming from the heart of the Trump administration--and undoubtedly from Secretary of Education Betsy DeVos.

I don't know if these punitive GOP proposals will make it into federal law. But if they do, Republicans will push millions of college borrowers into a lifetime of indebtedness.  It's almost as if the GOP wants to create an underclass of sharecroppers.

President Trump and his fiendish Secretary of Education (who has financial ties to the debt collection business) may think their scheme to punish student borrowers will play to the Republican base. But if these proposals get through Congress, there will be hell to pay in coming elections.  

The Democrats are missing a golden opportunity if they don't take up the banner of student-debt relief.  In my view, they should forget Russia and turn their venom toward Betsy DeVos, who may be Trump's Achillese heel. The Dems need to educate college borrowers about the nation's venal Secretary of Education and rouse them to righteous fury.

Betsy DeVos summer home: Maybe you could get a job there as pool boy


References

Douglas Belkin, Josh Mitchell, & Melissa Korn. House GOP to Propose Sweeping Changes to Higher EducationWall Street Journal, November 29, 2017.

Jillian Berman. House Republicans seek to roll back state laws protecting student loan borrowers. Marketwatch.com, December 7, 2017.

Danielle Douglas-Gabriel. GOP higher ed plan would end student loan forgiveness in repayment program, overhaul federal financial aidWashington Post, December 1, 2017.

Danielle Douglas-Gabriel. Dems raise concern about possible links betwen DeVos and student debt collection agencyWashington Post, January 17, 2017.













Thursday, November 9, 2017

Millions of Older Americans Are Delinquent On Their Loans: Long-Term Repayment Plans Will Make the Problem Worse

Several decades after obtaining their college degrees, millions of older Americans are still paying on their student loans. According to the Consumer Financial Protection Bureau, the percentage of student borrowers over 60 years of age who carry student-loan debt increased by 20 percent from 2012 to 2017.

Even more alarming is the rising number of older student borrowers who are delinquent on their student loans. In all but five states, delinquency rates among older student debtors went up over the last five years.

In California, for example, more than 300,000 people age 60 or older hold $11 billion in student-loan debt, and 15 percent of these borrowers are delinquent.

Delinquency rates for older borrowers vary substantially from state to state. In Georgia, Mississippi, Oklahoma, South Carolina, and West Virginia, one out of five student-borrowers age 60 or older are delinquent on their loan payments.

As the CFPB noted, these data show that an increasing number of older Americans are still shouldering student-loan debt at an age when most of them are living on fixed incomes.  And these data do not reflect the Department of Education’s recent campaign to recruit more and more college borrowers into income-based repayment plans that can stretch out for as long as 20 and even 25 years.

During Obama’s second term in office, the Department of Education rolled out two relatively generous income-driven repayment plans (IDRs): PAYE and REPAYE.  Both plans call for participants to pay 10 percent of their adjusted gross income on their student loans for a period of 20 years.

Most commentators have viewed these initiatives as a humane way to lower struggling borrowers’ monthly payments. But for many of the people in IDRS, probably most of them, the monthly payments don’t cover accruing interest. For these people, their IDRs cause their loan balances to go up even if they make regular monthly payments.  Thus, IDR participants will enter their retirement years with thousands of dollars in unpaid student-loan debt.

The CFPB report should be alarming to everyone. Already, we are seeing student borrowers enter their sixties with increasing levels of debt; and delinquency rates are climbing.

This is a crisis right now, but as the IDR participants reach retirement age, the crisis will grow worse. Indeed, it will be a calamity as millions of people try to service their student loans while surviving on Social Security checks and small pensions.

References

Older consumers and student loan debt vary by state. Consumer Financial Protection Bureau, August 2017.


Thursday, September 28, 2017

The Department of Education's Official 3-Year Student-Loan Default Rate is Baloney

During the First World War, it is said, the British military kept three sets of casualty figures: one set to deceive the public, a second set to deceive the War Ministry, and a third set to deceive itself.

Over the years, the Department of Education has released its annual 3-year student-loan default rate in the autumn, about the time the pumpkins ripen. And every year the default rate that DOE issues is nothing but bullshit. I can't think of another word that adequately conveys DOE's mendacity and fraud.

This year, DOE reported that 11.5 percent of the the 2014 cohort of debtors defaulted on their loans within three years and that only ten institutions had default rates so high that they can be kicked out of the federal student-loan program. That's right: among the thousands of schools and colleges that suck up student-aid money, only ten fell below DOE's minimum student-loan default standard.

Why do I say DOE's three-year default rate is fraudulent?

Economic hardship deferments disguise the fact that millions of people aren't making loan payments. First of all, DOE has given millions of student-loan borrowers economic-hardship deferments or forbearances that allow borrowers to skip their monthly loan payments.  These deferments can last for several years. 

But people who are given permission to skip payments get no relief from accruing interest. Almost all these people will see their loan balances grow during the time they aren't making payments. By the time their deferment status ends, their loan balances will be too large to ever pay back.

The colleges actively encourage their former students to apply for loan deferments in order to keep their institutional default rates down. And that strategy has worked brilliantly for them. Virtually all of the colleges and schools are in good standing with DOE in spite of the fact that more than half the former students at a thousand institutions have paid nothing down on their loans seven years after beginning repayment.

Second,  DOE's three-year default rate does not include people who default after three years.  Only around 11 percent of student borrowers default within three years, but 28 percent from a recent cohort defaulted within five years. In the for-profit sector, the five-year default rate for a recent cohort of borrowers was 47 percent--damn near half.

DOE's income-driven repayment plans are a shell game.  As DOE candidly admits, the Department has been able to keep its three-year default rates low partly through encouraging floundering student borrowers to sign up for income-driven repayment plans  (IDRs) that lower monthly loan payments but stretch out the repayment period to as long as a quarter of a century.

President Obama expanded the IDR options by introducing PAYE and REPAYE, repayment plans which allow borrowers to make payments equal to 10 percent of their discretionary income (income  above the poverty level) for 20 years.

But most people who sign up for IDRs are making monthly payments so low that their loan balances are growing year by year even if they faithfully make their monthly loan payments. By the time their repayment obligations cease, their loan balances may be double, triple, or even quadruple the amount the originally borrowed.

Alan and Catherine Murray, who obtained a partial discharge of their student-loan debt in bankruptcy in 2016, are a case in point. The Murrays borrowed $77,000 to obtain postsecondary education and paid back about 70 percent of that amount. But they ran into financial difficulties that forced them to obtain an economic hardship deferment on their loans.  And at some point they entered into an IDR.

Twenty years after finishing their studies, the Murrays' student-loan balance had quadrupled to $311,000!  Yet a bankruptcy court ruled that the Murrays had handled their student loans in good faith, and they had never defaulted.

DOE is engaged in accounting fraud. If the Department of Education were a private bank, its executives would go to jail for accounting fraud. (Or maybe not. Wells Fargo and Bank of America's CEOs aren't in prison yet.)  The best that can be said about DOE's annual announcement on three-year default rates is that the number DOE releases is absolutely meaningless.

This is what is really going on. More than half of the people in a recent cohort of borrowers have not paid down one penny of their student-loan debt five years into the repayment phase of their loans.  And the loan balances for these people are not stable. People who are not paying down the interest on their student loans are seeing their loan balances grow.

In short, DOE is operating a fraudulent student-loan program.  More than 44 million Americans are encumbered by student-loan  debt that totals $1.4 trillion.  At least half that amount--well over half a trillion dollars--will never be paid back.

Betsy DeVos' job is to keep the shell game going a little longer, which she is well qualified to do. After all, she is a beneficiary of Amway,  "a multi-level marketing company," which some critics have described as a pyramid scheme.

Betsy DeVos: The perfect person to oversee DOE's student-loan shell game

References

Paul Fain. Federal Loan Default Rates Rise. Insider Higher ED, September 28, 2017.

Paul Fain. Feds' data error inflated loan repayment rates on the College ScoreboardInside Higher Ed, January 16, 2017.

Andrea Fuller. Student Debt Payback Far Worse Than BelievedWall Street Journal, January 18, 2017.

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default ratesWashington, DC: Brookings Institution (2015).

Murray v. Educational Credit Management Corporation, Case No. 14-22253, ADV. No. 15-6099, 2016 Banrk. LEXIS 4229 (Bankr. D. Kansas, December 8, 2016), aff'd, Case No. 16-2838 (D. Kan. September 22, 2017).

Joe Nocera. The Pyramid Scheme Problem, New York Times, September 15, 2015.