Student-loan defaulters can lose their professional licenses in some states: America's 21st century equivalent of debtors' prisons

Americans may think the days of debtors’ prisons are over--those dark, dank jails where English magistrates tossed delinquent debtors in the 18th century. Read Charles Dickens' Pickwick Papers or Patrick O'Brian's Reverse of the Medal if you want the details.

But 21st century America is pretty damn close to 18th century England. Our government doesn't throw student-loan defaulters in debtors’ prison; but in 19 states, government agencies can seize professional licenses held by people who default on their student loans. According to the New York Times, lawyers, nurses, barbers, real estate agents, and psychologists have all had their licenses suspended or revoked because they defaulted on their college loans.

Millions of Americans have been beguiled by the promise of a bright future if only they get a college education. Perhaps they saw a for-profit college's advertisement on the subway--an advertisement depicting happy and prosperous individuals who got good jobs because they got a college degree.

And so they enroll. But they have to to take out student loans to pay for tuition and fees, and semester after semester their debt grows larger. And when they graduate (or drop out in discouragement) they often don't find good jobs.

Then, when these hapless student debtors are unable to make their monthly loan payments, the government's student-loan servicers cheerfully allow borrowers to defer their payment obligations while interest continues to accrue.

At some point, borrowers realize that they owe twice what they borrowed--even three times or four times what they borrowed. At that point their student loans are impossible to repay.

Then, when these unfortunate debtors default on their college loans, a cascade of misery showers down on them. The federal government garnishes their pay checks, seizes their income-tax refunds, and (for the elderly) even gobbles up a portion of their Social Security checks.

And--on top of all this--some states even seize defaulters' professional licenses, making it impossible for them to earn a living!

What have we become as a nation that we allow our most vulnerable young Americans (and some older Americans) to be scammed by the old canard that postsecondary education is the ticket to the middle class?

Let's see if one or two of the so-called progressives who seek the presidency will put license-suspension on their campaign agenda. Surely there is enough good will in Congress to pass federal legislation that prohibits the states from seizing people's professional licenses simply because they can't pay back their student loans.

And if Congress can't get that done, let's stop referring to our country as the Land of the Free and Home of the Brave. Because in fact, our nation treats student-loan debtors much like England treated delinquent debtors in the 18th century.

References

Jessica Silver-Greenberg, Stacy Cowley and Natalie Kitroeff. When Unpaid Student Loan bills Mean You Can No Longer Work. New York Times, November 17, 2017.

Department of Education slow rolls the Public Service Loan Forgiveness Program: Like a drunk weaving through traffic

For many years, the Department of Education has managed the federal student-loan program like a drunk creeping through heavy traffic. It has stumbled, reeled, dissembled, weaved and bobbed, but always avoided a head-on collision with reality.

But that time is over. Under Betsy DeVos's colossal mismanagement (and her predecessors), DOE has messed up the Public Service Loan Forgiveness Program (PSLF), thereby telegraphing to 44 million student-loan borrowers that Betsy Devos is either fiendishly devious or spectacularly incompetent.

The PSLF program is not complicated.  Under federal law, student-loan borrowers who work for a qualified employer (governmental agency or non-profit) and make 120 student-loan payments under an approved repayment plan are eligible to have remaining student-loan debt cancelled. (It's a little more complicated than that, but not much.)

Almost 1.2 million borrowers have applied to have their employment certified for PSLF eligibility. More than a quarter million applications were denied. That alone is a startling fact.

But it gets worse. About 28,000 people who are in the PSLF program (or at least believe they are in it) applied to have their student loans forgiven based on their representation that they had made the 120 required student-loan payments. How many people have obtained debt relief so far? Less than 100!

What are we to make of this gigantic snarl?

First, DOE has made the PSLF program needlessly complicated. After all, the government only needs to answer two questions to determine who is eligible for debt relief. Did the applicant work for an approved employer for 10 years? Did the applicant make 120 one-time payments on his or her student loans?

Second, the PSLF program was poorly designed, and DeVos's DOE has reached the startling realization that the program is astonishingly expensive.  In my opinion, DOE is dragging its feet about processing PSLF claims to postpone the reckoning day, when it will have to publicly admit that PSLF is going to cost taxpayers billions of dollars.

The Government Accountability Office (GAO) released a report almost two years ago that concluded DOE had underestimated the cost of various student-loan repayment options. I'm guessing DOE did not figure on the huge debt loads some PSLF applicants were accumulating from going to graduate school: MBA degrees, medical degrees, law degrees, etc.

According to GAO, the average amount of forgiven debt for the first 55 people who received student-loan forgiveness is almost $58,000. If  this average continues to hold, and all 890,000 people whose loans and employment were certified eventually get debt relief, the cost will be $50 billion! Meanwhile, DOE can expect PSLF requests for certification and debt relief to continue being filed into the indefinite future.

No wonder DOE is slow rolling the PSLF loan-forgiveness process.

 References

Stacy Cowley. 28,000 Public Servants Sought Student Loan Forgiveness. 96 Got It. New York Times, September 27, 2018.

Missing Paperwork for Private Student Loans May Make Them Uncollectible: Boo Hoo!

Some debt collectors for private student loans are finding it difficult to collect because they can't prove they actually own the debt.  According to the New York Times, "Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing."

A little background. The federal government is the largest student-loan lender; it now holds $1.4 trillion in outstanding federal-loan debt.  But there is also a smaller private student-loan market. About $108 billion is private student loans is held by banks and private financial agencies like Sallie Mae.

National Collegiate Student Loan Trusts, an umbrella name for 15 trusts, holds about $12 billion of the total private student-loan debt. More than 40 percent of that debt--$5 billion--is in default; and National  Collegiate has been aggressively pursuing defaulters in court. According to the Times, the trusts brought 800 collection cases last year--an average of 4 a day.

But National Collegiate has a big problem: when it goes to court it often cannot prove it is legally entitled to collect on the debt. How did that happen?

Many of these student loans were taken out more than 10 years ago by dozens of private banks. These loans were then bundled together into securities and sold to investors. A lot of this debt was sold and resold several times before it wound up in the hands of National Collegiate's trusts.

Somewhere along the way, a lot of important paperwork got lost, and now National Collegiate often can't prove it owns the underlying debt it seeks to collect. As a result hundreds of its debt collection cases have been thrown out of court. Boo hoo!

This is essentially the same problem that arose during the home mortgage crisis of 2008. Home mortgages were packaged into asset-backed securities and then sold and resold to various investors. When the loans went into default, the owners of the repackaged mortgages often could not prove they were entitled to collect the debt.

I have a few comments on National Collegiate's troubles.

First, the federal government doles out $150 billion a year in student aid. No one should be going to private lenders for student-loan money. If the higher education industry had any integrity, it would discourage students from taking out private loans. But our rapacious colleges and universities don't care if their students are taking out private loans to pay tuition.

Second, the private student-loan market grew after Congress passed the so-called Bankruptcy Reform Act of 2005, which made private student loans nondischargeable in bankruptcy unless the borrower could prove undue hardship. The banks know that their student-loan customers will find it almost impossible to discharge their private loans in bankruptcy.

Third, the banks have further protected themselves against losses by requiring student borrowers to find co-signers for their student loans. Millions of parents and grandparents have cosigned private loans for their relatives and are liable to repay them if the student defaults. And bankruptcy isn't an option for grandma or grandpa because they too are subject to the undue hardship rule.

In short, the private student loan industry is a sleazy business and ought to be shut down. Congress could close this industry almost overnight if it repealed the undue hardship standard in the 2005 Bankruptcy Reform Act.  And colleges and universities could help shut the industry down if they would publicly discourage their students from taking out private loans.

Personally, I don't give a damn if National Collegiate and its investors lose a ton of money because they don't have the paperwork proving they own the student loans they purchased.  After all, National Collegiate is a sophisticated party. If it purchased debt without obtaining the necessary documents proving ownership, it deserves to have its collection cases thrown out of court.

References

Stacy Cowley and Jessica Silver-Greenberg. As Paperwork Goes Missing, Private Student Loan Debt May Be Wiped Away. New York Times, July 17, 2017.

The Department of Education Fumbles the Public Service Loan Forgiveness Program

The Public Service Loan Forgiveness Program: The Best Option for Student borrowers With Six-Figure Debt

A few years ago, law professor Paul Campos wrote an advice book for people thinking about going to law school. If you borrow a lot of money to go to a second- or third-tier law school and graduate in the bottom half of your class, Campos warned, you probably won't make enough money to pay back your loans.

In such event, Campos advised, your only viable option is to get a job in the public sector and enroll in the Public Service Loan Forgiveness Program (PSLF). If you go that route, you will make monthly payments on your student loans for ten years based on a percentage of your income. When you've made 120 payments, the balance of your loan debt will be forgiven.

Campos's advice is good for anyone who is buried by student loans. If you racked up $100,000 or more in student loans and can't find a good job in the private sector, the PSLF program may be your only viable option. It is the financial equivalent of the last train out of Paris in the movie Casa Blanca. If Rick doesn't get on that train before the Nazis arrive, he's doomed.

The Department of Education Fumbles the PSLF Program: Is Betsy DeVos Out of Her Element?

Congress created the PSLF program in 2007, and the Department of Education has been promoting it ever since. DOE has instructed  PSLF participants to send their Employment Certification Forms (ECF) to FedLoan Servicing, DOE's approved PSLF processor, on an annual basis to verify they are in fact employed by a public service organization. More than half a million people are enrolled in the PSLF program, confident that their indebtedness will be cancelled after 10 years of public service employment..

But now it seems DOE may be reneging on its PSLF obligations. The American Bar Association sued DOE for not living up to its PSLF commitments, and DOE recently answered that law suit. In essence, DOE denied it had any obligation to honor FedLoan Servicing's decision to certify public service employment.

This is shocking. As Steve Rhode said in his blog about this development, "People who have worked ten years in jobs assuming their loans would be forgiven are potentially going to get some nasty surprises."

I don't know what to make of DOE's response to the ABA's lawsuit. If the PSLF program collapses, Betsy DeVos's credibility as the Secretary of Education, already compromised by her ties to the for-profit industry, will be completely destroyed.

To paraphrase  Walter Sobchak's remark to Donny in The Big Lebowski, "Betsy, you may be out of your element." DOE may come to its senses and straighten out the PSLF mess; in fact, I think that will probably happen.  But the political consequences of this episode will reverberate for a long time.

"Donny, you're out of your element."

References

Stacy Cowley. Student Loan Forgiveness Program Approval Letters May Be Invalid, Education Dept. Says. New York Times, March 30, 2017.

Steve Rhode. Public Service Loan Forgiveness Program Teeters With Unmitigated Disaster. Personal Finance Syndication Network, PFSyn.com, May 2, 2017.