College dropouts who don't pay off their student loans: The village of the damned

About 70 percent of high school graduates go on to college, but a lot of them drop out before getting their college degrees. And a good number of dropouts took out student loans to finance their studies.

What happens to these people?

A recent survey polled college dropouts who had outstanding student loans; and this is what the pollsters found.

• Respondents reported that they had, on average, almost $14,000 in student-loan debt.

• More than half of college dropouts said they were not making any payments on their student loans.

• More than a third of the survey respondents (35 percent) said they had not made a single payment on their student-loan debt. 

What are we to make of this?

First of all, indebted college dropouts are probably underestimating how much they owe on student loans. Other studies have shown that a lot of student borrowers are hazy about how much they borrowed, and some don't know the interest rate on their loans. Quite a few don't know the difference between federal loans and private loans, and aren't sure which type of loans they have.

So it seems fair to conclude that if indebted college dropouts report that they owe an average of $14,000, they probably owe more--maybe a lot more. For one thing, dropouts who aren't making loan payments may not understand how much accrued interest has been added to their loan balances. And dropouts who defaulted on their student loans may not realize that the debt collectors undoubtedly added default penalties to their accumulated debt.

It is true that some dropouts who aren't making student-loan payments may have obtained economic hardship deferments that temporarily excuse them from making monthly loan payments. But interest accrues on a student loan while it is in economic hardship status, which means that the loan balance is growing month by month.

This is what we can say for sure: Last year, 1.1 million student-loan borrowers defaulted on their loans at an average rate of 3,000 people each day.  And some percentage of that number are people who took out student loans to attend college and then dropped out.

Indebted college dropouts don't know it, but they have entered the village of the damned. If they defaulted on their student loans, the loan balances ballooned due to default penalties. Even if their loans are in forbearance, interest continues to accrue. At some point, these unfortunate dropouts will realize they are carrying debt loads they can't pay off.

At that point, they will only have two options. They can enter an income-driven repayment plan, which will stretch their payments out for 20 or 25 years. Can you imagine making monthly payments on student loans for a quarter of a century even though you dropped out of college without a degree?

The other option is bankruptcy, and that option is going to be more and more viable as the bankruptcy courts wake up to the fact that the student-loan program is a catastrophe that has wreaked misery and suffering on millions.

In my view, now is the time for people who are overwhelmed by student debt to file for bankruptcy.  It is true that student-loan debtors must prove undue hardship in order to get bankruptcy relief. But, as Matt Taibbi's article in Rolling Stone documented, a lot of people are suffering at the undue hardship level.

College droputs with student-loan debt: The village of the damned

References

Tyler Durden. (2017,November 7). About 33% of Students Drop Out of College; Here's How Many Go On to Default On Their Student Debt. zerohedge.com (blog).

LendEDU (2017, November 2). College Dropouts and Student Debt. LendEDU.com (blog).

Matt Taibbi. (2017, October). The Great College Loan Swindle. Rolling Stone.

The Wrong Move on Student Loans. New York Times, April 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).