Showing posts with label bankruptcy. Show all posts
Showing posts with label bankruptcy. Show all posts

Thursday, April 30, 2015

By the thousands, student-loan borrowers are dropping out of income-based repayment plans

Thousands of student-loan borrowers are dropping out of income-based repayment plans, the U.S. Department of Education admitted recently. As reported by the Chronicle of Higher Education, almost 700,000 borrowers dropped out of the plans during the course of  just one year--57 percent of the total number of people who signed up for them.

Why did they drop out? DOE says they lost eligibility because they didn't file their annual income documentation--data the government needs to set borrowers' individual monthly payments.

What happened to those dropouts?  DOE says some of them signed up for economic-hardship deferments, some went back into standard 10-year repayment plans, and some slipped into delinquency.

This must be an astonishing turn of events for the Obama administration, which has aggressively promoted income-based repayment plans as a way to keep student-loan default rates down and give student borrowers some relief from high monthly loan payments. Most people who make monthly payments based on their income have lower payments than people who pay off their loans under the federal government's standard 10-year repayment plan.

There's a catch of course. Income-based repayment plans stretch borrowers' monthly payments out over 20 or even 25 years. Moreover, if borrowers' monthly payments are set too low, the payments will  not cover accruing interest, in which case student-loan debtors will see their loan balances go up rather than down, even if they faithfully make all their monthly payments.

Nevertheless, for student-loan borrowers who are unemployed. marginally employed, or simply borrowed too much money, income-based repayment plans are a lifeline because they can dramatically lower the amount of a student-loan borrower's monthly payments.

So what is the Obama administration doing to turn this situation around? According to the Chronicle,  the Department of Education will soon take over the process of notifying borrowers of their annual income-reporting obligations.  DOE is even consulting with "social and behavioral scientists" in order to craft more effective notices. Lots of luck, guys.

Personally, I was astonished to learn that so many people are falling out of income-based repayment plans--the most generous student-loan repayment programs that the federal government offers.. This development is simply another indication that the federal student-loan program is out of control.

Let's review the evidence one more time:

  • The two-year student-loan default rate (the percentage of students from the most recent cohort who default on their loans within two years of beginning repayment) doubled in just seven years, according to DOE's own data. In 2007, DOE reported a two-year default rate of 4.7 percent. In 2013, the two-year default rate was 10 percent.
  • Almost 9 million people in the repayment phase of their loans have economic-hardship deferments and are not making payments on their student loans. Meanwhile, their loan balances are increasing due to accruing interest.
  • About 1.5 million people have signed up for income-based repayment plans, but more than half of them have already dropped out due to the fact that they didn't file their obligatory annual income reports.
We can tinker with the student-loan program in many ways as the Department of Education and the policy tanks are now doing. But the fact remains that millions of student-loan debtors are under water financially and have basically dropped out of the economy. This reality is illustrated by the fact that more that half of the people in the generous income-based repayment programs are not bothering to file their annual income reports.

The only way out of this morass is to admit how bad the crisis is, which will require DOE to tell the truth about the student-loan default rate. Then we need to crack down on higher-education institutions that are exploiting college students. Finally, we must open up the bankruptcy process to allow honest but unfortunate student-loan debtors to discharge their student loans in bankruptcy.

Bleep it, Dude. Let's go bowling. 

References

Robert Cloud & Richard Fossey, Facing the Student-Debt Crisis: Restoring the Integrity of the Federal Student Loan Program. Journal of College & University Law, 40, 467-498.

Kelly Field. Thousands Fall Out of Income-Based Repayment Plans. Chronicle of Higher Education, April 2, 2015.

















Tuesday, September 30, 2014

Almost by itself, the Student Loan Program is Destroying the American Middle Class: The sad story of Steve and Darnelle Mason

Several newspapers carried a story about Steve and Darnelle Mason, a married couple who co-signed student loans for their daughter Lisa to attend college.  Lisa borrowed a lot of money--$100,000, but it was probably a good investment because she graduated with a nursing degree that led to a job as a critical-care nurse.
Lisa Mason
Photo credit: Steve Mason &
USA Today

Unfortunately, Lisa died at age 27 of liver failure, leaving three young children.  Had Lisa borrowed the money from the federal student loan program, the debt would have been forgiven with her death.

But Lisa borrowed the money from private banks, and loan-service companies that took over her loans didn't forgive the debt. As co-signers on Lisa's loans, Lisa's parents are liable for the full amount.  And with penalties and accrued interest, that debt has  ballooned to $200,000.

This sad story, which has gained national attention, demonstrates the risk parents take when they co-sign student loans for their children's college education, particularly when they co-sign a loan from a private bank. They are on the hook for the full amount. And unlike the federal student loan program, most banks do not have income-based repayment options. Nor do they grant economic hardship deferments.

Jeffrey Dorfman (2014) recently wrote a story for Forbes arguing that there is no student loan crisis. Dorfman would probably say people like Steve and Darnelle Mason are a rare exception, As Dorfman, pointed out, most people borrow fare less money to attend college than Lisa Mason did, often less than a typical car loan.

It is true of course that the Mason's story is exceptional. Most 27 year-old people don't die. But a lot of them are unable to manage their student loans, and parents who co-sign those loans are on the hook to pay them back.  Parents can lose their retirement savings, the equity in their homes, literally everything they've worked for over a lifetime if they co-sign their child's student loan and the student can't pay it back.

What a lot of parents don't realize is that student loans are very hard to discharge in bankruptcy. In 2005, the banks were able to get Congress to amend the Bankruptcy Code to make private student loans nondischargeable unless the debtor could show "undue hardship."  And  the courts have interpreted "undue hardship" very harshly.  Just a few months ago, a 63-year old man's petition to discharge almost a quarter million dollars in student loans for his children was denied, even though the man was unemployed and about to lose his home in foreclosure (Murphy v. Educational Credit Management Corporation, 2014).

Millions of people are suffering from unmanageable student loans.  Although most people don't borrow as much as Lisa Mason did, even a small loan is impossible to pay if the debtor is unemployed.  And the poor souls who fall behind on their payments and default often see their loan balances double because the creditors add accrued interest and penalties to the unpaid debt.

President Obama and Secretary of Education Arne Duncan know how bad the student-loan crisis is,but their efforts to bring this crisis under control have been feeble.  The Department of Education doesn't report the actual default rate and its solution to the overall problem is to encourage student-loan debtors to sign up for long-term income-based repayment plans.

In essence, the Obama administration's response to the student-loan catastrophe has been to obscure the enormity of the problem, hoping it won't blow up before President Obama leaves office.  What needs to be done?

First and foremost, the Bankruptcy Code must be amended to make unmanageable student -loan debts dischargeable in bankruptcy. This one reform would shut down the private student loan business because the banks would not lend money for education if they knew student-loan debtors could wipe out their student loan debt in a bankruptcy court.

Steve and Darnelle Mason, for example, would be able to discharge their debts in bankruptcy if they had maxed out their credit cards to go on expensive vacations or had foolishly invested in some get-rich-quick scheme. But they can't discharge the student-loan debt that Lisa accumulated in good faith to get a college education, even though it is crushing them financially.

 Day by day, the student-loan program is destroying the middle class by making it impossible for young people to buy homes, start families, and save for their retirement.  And many parents who co-signed student loans for their children are now faced with the loss of their entire life savings.

This state of affairs is not right, and we won't truly begin to deal with the student-loan crisis until we give people who are overwhelmed by student debt a fresh start in bankruptcy.

References

Grant, Tim. Private student loan debt can outlive student. Pittsburgh Post-Gazette, September 12, 2014. Accessible at http://www.post-gazette.com/business/2014/09/12/Private-student-loan-can-outlive-student/stories/201409120016.

Dorfman, Jeffrey. Time To Stop the Sob Stories About Student Loan Debt. Forbes, September 18, 2014. Accessible at http://www.forbes.com/sites/jeffreydorfman/2014/09/18/time-to-stop-the-sob-stories-about-student-loan-debt/

Murphy v. Educational Credit Management Corporation, 511 B.R. 1 (D. Mass. 2014).

Serico, Chris. After daughter's death, parents plead for forgiveness of her $200K student-loan debt. USA Today, July 14, 2014. Accessible at http://www.today.com/parents/after-daughters-death-parents-plead-forgiveness-her-200k-student-loan-1D79996678

Marian Wang,  Beckie Supiano, & Andrea Fuller. Parent Plus Loans: How the Government Is Saddling Parents With Loans They Can't Afford. Huffington Post, October 5, 2012. Available at: http://www.huffingtonpost.com/2012/10/05/parent-plus-loan-government-parents-student-debt_n_1942151.html

Marian Wang. As Parents Struggle to Repay College Loans for Their Children, Taxpayers Also Stand to Lose. Huffington Post, April 4, 2014.  Available at: http://www.huffingtonpost.com/2014/04/04/parent-plus-loans_n_5094931.html

Thursday, September 11, 2014

But who really cares? Rosemary Anderson, age 57, borrowed $65,000 in college loans and now owes $152,000

Let's take a minute to examine what happened to Rosemary Anderson, a student-loan debtor who was featured in two CNN stories recently. More than twenty years ago, Rosemary began borrowing money to attend college; and she eventually got a bachelor's degree and a master's degree in human resources. She has a job and she makes pretty good money.

Nevertheless, Rosemary is now 57 years old, and the $65,000 she originally borrowed has grown to $152,000! How did that happen?

As for so many Americans trying to survive in today's dog-eat-dog economy, life got in the way. Rosemary experienced a divorce, a job loss, and a family illness. Loans got out of hand, and she stopped making payments for a period of time. Later, she consolidated her loans at an interest rate of 8.25 percent--far higher than the prevailing rate.  Interest accrued, penalties were tacked on to what she borrowed; and now Rosemary owes $$152,000.

Although the CNN article didn't make her current situation entirely clear, apparently Rosemary is now in a 25-year Income-Based Repayment Plan, because CNN reported she will be paying nearly $700 a month until she is 81 years old!

That's right--she will finally finish paying off her student loans more than 40 years after she got her undergraduate degree. "I will be working for as long as I'm employable. I will never be able to retire," Rosemary said in the CNN story.

Is that how the American dream is supposed to work? Is this how higher education is supposed to pay off?

Some people might tell Rosemary that she has no one but herself to blame. You borrowed too much money, they might tell her, or you should never have stopped paying on your loans.

Well, sure, Rosemary probably made some mistakes in financing her higher education, but a lot of people make mistakes. That's what bankruptcy is for. But people like Rosemary will find it very difficult to discharge their student loans in bankruptcy court.

But who really cares? The media is obsessed with what happened in Ferguson, Missouri and the details of Ray Rice's elevator assault on his girl friend. Rosemary Anderson got featured in a couple of CNN stories, but millions of people in similar situations suffer in silence.

Meanwhile, college and universities, both public and private, gorge on federal student loan money and the money students borrow from private banks to pay for their college education. University presidents may pretend to care  about distressed student debtors, but they are focused on raising money to construct more buildings. President Obama pretends to care, but he's not doing anything much to help people like Rosemary Anderson. Maybe Rosemary could get a golf date with the President so she could explain her situation to him personally.

No sensible person can read Rosemary Anderson's story without coming to the conclusion that people like Rosemary need easier access to bankruptcy. But that's not going to happen any time soon. Why? Because the people who have the power to come to Rosemary's aid don't really care about people like Rosemary.

And that's pretty scary to think about because there are literally millions of distressed student-loan debtors, and the number grows larger every day.

References

Blake Ellis. Student Loan Debt Surges for Senior Citizens. CNN, September 11, 2014. http://finance.yahoo.com/news/student-loan-debt-surges-senior-211900000.html

Patrick M. Sheridan. I'm 57 and owe $152,000 in student loans. CNN, August 14, 2014. http://money.cnn.com/2014/08/13/news/economy/older-student-debt?source=yahoo_hosted



Saturday, September 6, 2014

Memo to Parents: For God's Sake, Don't Borrow Money to Pay For Your Kids' College Education

Are you a parent who is thinking about taking out a loan to pay for your child's college education? Before you do, read Murphy v. Educational Credit Management Corporation, a recent federal court decision.

In 2002, Robert Murphy lived in Duxbury, Massachusetts and was the president of a corporation. Unfortunately, he lost his job after the corporation was sold and its operations were moved overseas. Although he had diligently looked for a new job, he was still unemployed in 2014.

Between 2001 and 2007 Murphy took out 12 loans to finance a college education for each of his three children. This is remarkable, since he was unemployed during most of this six-year period. Apparently, Murphy had no difficulty borrowing money for his children's education even though he was out of a job. By May 2014, when a federal court issued its appellate opinion on his bankruptcy case, Murphy owed more than $240,000 on these loans.

By this time, Murphy was 63 years old, unemployed for almost 12 years, and in dire financial circumstances. He owed $700,000 on a home that was only worth $500,000, and his home was going into foreclosure. Although Murphy had once owned an IRA worth about a quarter of million dollars, he had cashed it out  to cover expenses. The court did not report on Murphy's family income in 2014, but it noted that Murphy and his wife had only earned about $13,000 in both 2010 and 2011, money his wife had earned as a teacher's aide.

Pretty sad story, you might think.  Nevertheless, a federal court upheld a bankruptcy court's decision to deny Murphy's request to have his children's student loans discharged.  Although the court admitted that Murphy had no current ability to pay off the loans, it noted that Murphy was in good health and might still find a high-earning job that would allow him to pay off his enormous debt.

Ending its opinion on a remarkably callous note, the court observed that Murphy had struck a bargain with the government when he borrowed money to pay for his children's college education.  "All bargains contain risks," the court pointed out, and Murphy's bargain was especially risky since he had been unemployed during the time he took out most of the loans. 

In short, the court ruled, Murphy's situation did not present "truly exceptional circumstances" that would permit him to shed his student-loan debt.  Thus, the federal court agreed with the bankruptcy court's  decision to deny Murphy relief in bankruptcy for his children's student loans.

The Murphy decision serves as a warning to all parents who are thinking about borrowing money to help their children get a college education. Whether the parent takes out a federal student loan or borrows money from a private bank, a college loan cannot be discharged in bankruptcy unless the parent can show "undue hardship."

Mr. Murphy was unable to show undue hardship in spite of the fact that he had been unemployed for 12 years, had liquidated his retirement account and was in the process of losing his house in foreclosure.

According to a recent article in the Huffington Post, parents currently owe an accumulated $62 billion in Parent Plus Loans, which are guaranteed by the federal government. And this figure doesn't include loans parents took out with private banks that are not federally guaranteed.  A  2012 Huffington Post article reported that about one million Parent Plus loans were taken out during 2011, totally more than $10 billion in just that one year.

Parents who guarantee their children's college loans or who take out loans to pay for their children's education put their financial futures at grave risk.  Before borrowing to pay for your children to go to college, you should think about Mr. Murphy. Sixty-three years old, unemployed, and living on an income near the poverty level, Mr. Murphy is burdened by almost a quarter million dollars of student-loan debt.  That's a pretty scary story.

References

Murphy v. Educational Credit Management Corporation, 511 B.R. 1 (D. Mass. 2014).

Marian Wang,  Beckie Supiano, & Andrea Fuller. Parent Plus Loans: How the Government Is Saddling Parents With Loans They Can't Afford. Huffington Post, October 5, 2012. Available at: http://www.huffingtonpost.com/2012/10/05/parent-plus-loan-government-parents-student-debt_n_1942151.html

Marian Wang. As Parents Struggle to Repay College Loans for Their Children, Taxpayers Also Stand to Lose. Huffington Post, April 4, 2014.  Available at: http://www.huffingtonpost.com/2014/04/04/parent-plus-loans_n_5094931.html

Friday, April 4, 2014

More Bad News About Student Loans: The Default Rate for Parent PLUS Loans Has Nearly Tripled Since 2006

Inside Higher Education reported today that the default rate for Parent PLUS loans has nearly tripled since 2006.  According to the Department of Education's most recent report, the three-year default rate on these loans is 5.1 percent.  In 2006, the PLUS loan default rate was only 1.8 percent.

The higher PLUS loan default rate doesn't sound too bad when compared to the overall student-loan three-year default rate--about 14 percent, according to DOE's report last October.  But let's look at the PLUS Loan default rate for parents of students attending for-profit colleges--13.3 percent! 

That's a scary number. And keep in mind that parents are not required to begin making loan payments until their children complete their studies.  If a student takes six years to graduate  (which is typical) or enrolls for graduate studies, the parent is not obligated to make loan payments until those studies are complete. Meanwhile, the interest is accruing on those loans--making them more difficult to repay.



Some institutional players--the Historically Black Colleges and Universities, in particular, are protesting recent efforts by DOE to tighten loan standards for PLUS loans. They say that making it more difficult for parents to borrow money for their children to attend college will disproportionately effect African American families and make it more difficult for African Americans to attend college.

But the HBCUs are primarily thinking about themselves, don't you think?  They don't want the feds to reduce the flow of federal student-aid dollars by making it harder for parents to take out PLUS loans.

A number of people commented on today's Inside Higher Education article, and it is clear to me that many of the commentators know a lot about the PLUS loan issue.  But as of this morning, not a single commentator pointed out that PLUS loans, like all federally-sponsored student loans cannot be discharged in bankruptcy unless the parents can show "undue hardship."

In other words, parents who borrow money under the PLUS program don't have reasonable access to the bankruptcy courts if they run into financial trouble caused by illness or the loss of a job. Thus, if their children get in over their heads by borrowing more money than they can pay back, both the student and the parents will be saddled with a debt that cannot be discharged in bankruptcy absent very unusual circumstances.

The higher education industry's discussions about the federal student loan crisis has an Alice in Wonderland quality about it.  The colleges and universities--whether public, private, for-profit or HBCUs--are primarily interested in keeping that federal student aid money flowing. They are like crack addicts--addicted to federal money just to keep their doors open.

We should be making every effort to keep college costs from continuing to rise. We should discourage parents from taking out personal loans to pay for their children's education. And--this is very important--we should amend the Bankruptcy Code to allow overburdened student loan debtors to discharge their debts in bankruptcy, whether they are students or the parents of students.

References

Michael Stratford, Education Department releases default rate data on controversial Parent PLUS loans. Inside Higher Education, April 3, 2014.  Available at:




Thursday, November 29, 2012

Arne Duncan Did Such A Great Job Managing the Student Loan Crisis, Let's Make Him Secretary of State!

Secretary of Education Arne Duncan
After Arne, the deluge
credit(Wikipedia)
In a recent New York Times editorial, Thomas Friedman endorsed Secretary of Education Arne Duncan as the next Secretary of State. Right.  Duncan has done such a great job managing the nation's student loan crisis, let's put him in charge of the Middle East.

Without a doubt, the federal student loan program is DOE's biggest challenge. As everyone knows, the program has about $1 trillion in outstanding student loans and about 6 million people are either behind on their loan payments or in programs designed to help people who can't make their regular payments.

What has DOE done about the federal student loan program under Secretary Duncan's watch?

First, DOE has increased the measurement period for computing default rates from two years after the loan repayment period begins to three years. This is a good thing, because it moves us closer to determining what the real default rate is.

But research shows that most student-loan debtors default after three years,and we know that some For-Profits have encouraged their former students to apply for economic hardship deferments to keep those students from showing up as defaulters. We still don't know what the default rate is over the life of students' repayment period, but it is much higher than DOE reports. The default rate for students attending for-profit schools is quite high--maybe 50percent.

Second, the Obama administration has eased the repayment terms for borrowers who elect to enter the Income-Based Repayment Program, which is also a good thing. But we are not solving the student-loan crisis by putting borrowers in 20 year repayment plans.  In fact, we may be creating a new class of indentured servants, people who pay a percentage of their income to the federal loan program for the majority of their working lives.

I realize the federal student loan program has enormous economic and political dimensions, with many powerful players wedded to the status quo.  I would not expect Arne Duncan to solve all the problems associated with the program without broad political support.

Nevertheless, these are the things that President Obama and Secretary Duncan could have done and should have done, whether or not there was Congressional support.

Number One: DOE needs to report an accurate student-loan default rate, which it has not done. Instead, the public has had to rely on outside agencies to provide some clues as to what is going on. The Federal Reserve Bank of New York's recent report is enormously informative, but the Reserve Bank relied on a credit agency, not DOE, to get data to assess the student loan program.

Number Two: The Obama administration and DOE could stop the garnishment of elderly student-loan debtors' Social Security checks. Social Security income is exempt from garnishment for a wide variety of debt, but not student loans.  This year, the government garnished Social Security checks of 119,000 elderly people (Lewin, 2012). This practice is a scandal and undermines President Obama's image as a person who truly cares about Americans suffering economic hardship.

Number Three:  I know I am repeating myself, but we must provide reasonable avenues for people to discharge their student loans in bankruptcy. Presently, a significant percentage of people make bad choices when borrowing money to attend college. Instead of enhancing their economic future, they have sealed their economic fate--basically casting themselves out of the middle class because they are saddled by unmanageable student-loan debt.  For these people, the student-loan mess is not just an economic crisis, it is a crisis of human suffering.

In years to come, when Arne Duncan's tenure as DOE Secretary is assessed, historians will say he did an admirable job of managing the student-loan crisis, which grows bigger every day. But we don't need a problem manager to head DOE right now, we need a problem solver.  Arne Duncan has not been a problem solver, and for someone of Thomas Friedman's status to suggest that Duncan should run the State Department is difficult for me to understand.  (Fortunately, Duncan said no to Friedman's suggestion (Fabian, 2012).

References

Meta Brown, Andrew Haughwout, Donghoon Lee, Maricar Mabutas, and Wilbert van der Klaauw. (2012). Grading Student Loans. Federal Reserve Bank of New York. http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html

Fabian, Jordan (November 28, 2012). Education Secretary Says No to Secretary of State. ABC News. http://abcnews.go.com/ABC_Univision/Politics/education-secretary-arne-duncan-secretary-state/story?id=17826816#.ULd-4Ky5Plg

Thomas L. Friedman (November 27, 2012). My Secretary of State, New York Times.

Tamar Lewin (November 12, 2012). Child's Education, but Parents' Crushing Loans. New York Times.


 

Monday, November 26, 2012

Borrowing money at interest: The root cause of the student loan crisis

Many people underestimate the magnitude of the student loan crisis because they forget that student-loan debtors are borrowing money at interest and that this interest gets added to the amount borrowed if the borrowers get behind on their payments.

Thus, when we read the published bankruptcy court opinions, we see debtor after debtor who is trying to discharge a debt that is two times or even three times the amount they orginially borrowed. For example, in In re Bene (2012), Donna Bene borrowed about $17,000 in the 1980s to finance an education that she never completed due to the fact she had to leave school to care for her aging parents. She was unable to make her loan payments, and by the time she filed for bankruptcy, the amount of her debt, including fees and accrued interest, was $56,000--three times the amount she originally borrowed!

The York Times, the Obama administration, and other fuzzy-minded liberals think that economic hardship deferments and income-based repayment plans (IBRPs) provide meaningful relief for overburdened student-loan borrowers, but they  are apparently ignoring the fact that interest accrues while people participate in these programs. People who obtain economic hardship deferments for a period of even three or four years will find the amount they owe has grown substantially. 

The case of In re Halverson illustrates this phenomenon. Mr. Halvserson obtained economic hardship deferments on his student loans for many years and was never in default. Nevertheless, by the time he filed for bankruptcy, when he was in his 60s, his $132,000 debt and grown to almost $300,000.

Likewise, people who participate in IBRPs and whose adjusted payments are less than the accruing interest on their loans will discover the amount they owe will grow over the years--not shrink--because the interest is piling up even though they are making regular payments.

The student-loan guarantee agencies, which are the creditors in student-loan bankruptcy cases, have been asking the bankruptcy courts to put debtors on 25-year IBRPs, which is just crazy.  Ms. Bene and Mr. Halverson would have both been in their 90s before completing their IBRPS had they been required to do so. Fortunately, the bankruptcy courts discharged their debts and did not make these unfortunate people go through such a heartless and fruitless exercise.

There was a time--in pre-Reformation Europe--when loaning money at interest was considered sinful. And not so long ago, the states had enforceable usury laws that put limits on the amount of interest that could be charged on a debt.   In the jurisdiction where I practiced law, a creditor could charge no more than 10.5 percent on most debts.  Today, however, banks and credit card agencies are virtually unrestricted in the amount of interest they can charge.

Dorothy Day, the greatest American Catholic of the 20th century and co-founder of the Catholic Worker movement, subscribed to the ancient Catholic doctrine on usury, and she refused to accept interest on money owed to the Catholic Worker.  In 1960, she famously returned interest on money owed the Catholic Worker by the City of New York. The City had bought a piece of property from the Catholic Worker for $68,700, but there was some delay in making payment. When the check arrived, it included an additional $3,579.39 in accrued interest.

Dorothy sent the interest money back to the City of New York with this explanation (Day, 1963, p. 191):
We are returning interest on the money we have recently received because we do not believe in "money-lending at interest." As Catholics we are acquainted with the early teaching of the Church. All the early Councils forbade it, declaring it reprehensible to make money by lending it out at interest . . . .
Today, unfortunately, American society runs on borrowed money.  Presently, our government is keeping interest rates low for the expressed purpose of encouraging people to buy and borrow more. And where has all this borrowing gotten us? Americans now owe trillions of dollars in debt, including $1 trillion in student-loan debt alone.  College tuition is now so high at both public and private colleges that students are forced to borrow in order to get an education.

There is no easy way back from the abyss, but we can start by easing the burdens being borne by overstressed student-loan borrowers and by putting firm caps on college tuition costs.

References

Dorothy Day. Loaves and Fishes. Maryknoll, NY: Orbis Books, 1963.

In re Bene, 474 B.R. 56 (Bankr. W.D.N.Y. 2012).

In re Halverson, 401 B.R. 378 (Bankr. D. Minn. 2009).

 
 




Monday, November 12, 2012

Crocodile Tears for Overburdened Student-Loan Debtors: Congress or the Obama Administration Should Do Something Tangible to Help These People


A recent article in the New York Times (Lewin, 2012) reported on the plight of older Americans who took out loans to pay for their children’s college education.   About 2.2 million people who are 60 years old or older owe on student loans, and the total amount of their debt is $43 billion. According to experts cited in the Times, almost all of these loans were taken out by parents to pay for their children’s education.  Parent Plus loans, loans taken out by parents for their children’s college education, now represent about 10 percent of all the federal student loan money that is borrowed.
Crocodile tears for the overburdened
student-loan debtor
Senior debtors who are in arrears on student loans can see their Social Security checks garnished.  So far this year, the federal government has garnished the Social Security checks of 119,000 people (as reported in the Times).  
President Obama and Governor Romney talked some about the federal student-loan crisis during the presidential campaign. President Obama made much of the fact that he pushed through the direct lending program for college students.  But neither President Obama nor Governor Romney offered any significant relief for the millions of people who are drowning in student-loan debt.  In my opinion, both men cried crocodile tears—expressing empathy and sympathy while proposing nothing that would give these sufferers some relief.
What can be done to help these poor people?
Proposal Number One. Congress should pass a law protecting people’s Social Security checks from garnishment for delinquent student loans. If Congress won’t do this, President Obama should stop the garnishment of Social Security checks by Executive Order, much the same way that he implemented the Dream Act, which Congress refused to pass.
Proposal Number Two. Overburdened student-loan debtors—including parents who went into debt to finance their children’s education—should have the same access to bankruptcy relief that is available to any other debtor who has unsecured loans.   Scholars have argued for this change in the Bankruptcy Code for many years.
Proposal Number Three. We’ve got to kick the for-profit colleges out of the federal student loan program.  The for-profit sector has the highest student-loan default rates, and many of them have engaged in unfair recruiting practices to attract students. Not all for-profit colleges are bad eggs, but there are enough problems in this sector to justify removing them from the federal student-loan program.
Our politicians can cry crocodile tears about the suffering being experienced by student-loan debtors who are unable to pay back their loans, but those tears won’t be genuine until the federal government in both the Executive and Legislative branches take tangible action to provide relief for student-loan debtors and their parents—and the action they need to take is painfully obvious.
References

Lewin, Tamar.(2012, November 11).  Child's Education, but Parents' Crushing Loans. New York Times.

Thursday, October 25, 2012

The Private Student Loan Scandal: More Worthless Advice From the New York Times (which cares so much about the little guy)

You think the federal student loan program is a mess? You should take a look at the private student loan program.  In contrast to federal student loans, which have fixed interest rates, private loans (the loans students take out from private banks and other financial institutions) often have variable interest rates.  The federal loan program--for all its many faults--at least allows students to obtain economic hardship deferments and offers an income-based repayment program (IBRP).  Private student-loan lenders are not obligated to show an overstressed debtor any mercy--and often they do not. Many students are not even aware of the difference between federal student loans and private loans and are shocked to learn that the terms and conditions of their private loans are more onerous than the federal program.

The New York Times--that tireless champion of the little guy--made this tepid suggestion for reforming the private student-loan program on today's editorial page (October 25, 2012).

The federal government needs to open up refinancing and debt relief opportunities for [private student-loan borrowers], as it did for some mortgage holders. The [Consumer Financial Protection Bureau] should also set national standards for loan servicers to require clear disclosure of conditions . . . and prompt resolution of customer requests for information. And borrowers who might be eligible for federal student loans should be advised to examine that option before plunging headlong into private debt.
Yep. A little more federal regulation will straighten out the private student loan scandal.  That's like saying Mussolini would have been a little nicer if he had only gotten the right medication.

If we want to stop the abuses in the private student-loan industry, we only need to do one thing: allow insolvent private student-loan debtors to discharge their loans in bankruptcy like any other non-secured debt.  They could do that until 2005, when the banking industry persuaded Congress to pass legislation to make it almost impossible to discharge a private student loan in bankruptcy.

If the banks knew their student-loan borrowers could file bankruptcy and discharge their loans, they would have an incentive to work with overstressed borrowers.  In fact, they might get out of the student-loan business altogether.

The Times' latest suggestion for reforming the massive student-loan debacle is typically tepid, not coming close to the heart of the problem. But what do you expect from a newspaper that makes its money selling advertising space to such luxury firms as Versace, Saks Fifth Avenue, and Armani? Do you think the Times really cares about some poor smuck who got in over his head by taking out a private student loan from Wells Fargo?

References

Editorial (2012, October 25). Student Debt Debacles. New York Times, p. A24.
   

Friday, June 8, 2012

Thanks, NY Times, for Another Tepid Editorial About the Student Loan Crisis

In The Big Lebowski, Bunny Lebowski tells the Dude that her boyfriend is a nihilist. "He doesn't care about anything," she explains.

The Dude, Donny and Walter:
"That must be exhausting," the Dude replies sympathetically.

This scene reminds me of the New York Times editorial writers. Every day, they go to work and pen editorials opining on all the world's problems: global warming, the crisis in the Middle East, the European Debt crisis, obsesity--it must be exhausting!

Of course, not all of the Times' editorial advice is useful.  Earlier this week, a Times editorial, entitled "College's True Cost," commended the Obama administration's efforts to get colleges to communicate more clearly with students about the cost of attending college. As the Times reported approvingly, "[t]he Obama administration is developing a standardized form" that all colleges can use to report on how much a year of college costs and estimating the monthly payments students will owe when paying off their student loans.

"Unfortunately," the Times concluded, "colleges are unlikely to embrace this forthright approach unless the federal government makes it mandatory." Right. More government regulations will solve all our problems.

Obviously, givng students more information about their student-loan obligations is a good thing. But giving students clearer information about their student-loan debt burden is not going to solve the student-loan crisis any more than telling people how many calories are in a Big Mac will solve the nation's obesity crisis. People are still going to buy those Big Macs and students are still going to take out college loans because most of them can't afford to attend college without borrowing a lot of money.

Solving the student-loan debt crisis is going to take more than the creation of a standardized form for colleges to give students when they dole out student-loan money. As I've said before, these things must be done:
  • The Department of Education must stop hiding the true student-loan default rate and give the public more accurate reports on how many people have stopped paying on their student loans.
  • Insolvent student-loan debtors must be given reasonable access to the bankruptcy courts.
  • The Federal government must stop financing the for-profit schools and colleges, which have extraordinarily high student-loan default rates.
  • Colleges must operate more efficiently and rein in their costs.
Unless these things are done, other reform tactics are just a cosmetic approach to a very serious national problem.

References

Editorial (2012, June 7). College's true cost. New York Times, p. A24.

Tuesday, April 17, 2012

The New American Serfs: Student-Loan Debtors in the Federal Income Contingent Repayment Plan


Slavery in the United States ended with the Civil War, but slavery in another form lived on.  Slavery was replaced by a new kind of bondage, whereby tenant farmers and share croppers basically became serfs to their landlords and were as bound to them as if they were still human chattel.  The age of the share cropper and the tenant farmer did not end until the Great Depression, when the rural poor fled the land and migrated to the cities or to California.

But those days are over, right? No one in the United States is a slave or an indentured servant in the 21st century. 

Sadly, our national government has created a new form of bondage, which it imposes on college students who participated in the federal student loan program but can’t pay back their loans.  Some of these former students are burdened with student-loan obligations for decades--hounded by the loans they cannot repay and the accumulating interest on their debt. Some of them have become true indentured servants--bound to pay a portion of their income to their federal student-loan creditors for a majority of their working lives.

The Disturbing Case of In re Stevenson

If you think I have overstated my case, you should read In re Stevenson (2011), a recent decision by the U.S. Bankruptcy Court in Massachusetts. Janice Stevens took out two student loans in 1983 to obtain additional education beyond her bachelor’s degree. She took out a third loan in 1987 and another in 1992. By 2008, when she filed for bankruptcy, Ms. Stevenson was in her mid-50s, and her total indebtedness was approximately $112,000, including accrued interests and costs.

Ms. Stevens filed an adversary proceeding in bankruptcy court, seeking to have her student loans discharged on the grounds of undue hardship.  Most people would think she had a pretty good case. Although she had held good jobs over the years, she had suffered periods of joblessness and homelessness and had sometimes lived in homeless shelters. In addition, Ms. Stevenson had health issues--back problems, high blood pressure and an autoimmune disease that required her to take medicine.

During the bankruptcy proceedings, Ms. Stevenson held a part-time job at Walgreens, earning less than $500 a month. She supplemented her meager income with unemployment checks, which were scheduled to terminate in a matter of months.  She also received a monthly subsidy from the State of Massachusetts to help her pay her rent.

In spite of Ms. Stevenson’s bleak economic circumstances, Judge Joan Feeney ruled that her student loans were not dischargeable in bankruptcy. Judge Feeney concluded that Ms. Stevenson should continue paying her loans through the federal government’s Income Contingency Repayment Plan (ICRP), whereby she would pay a percentage of her income toward paying down her loans for a period of 25 years.  At the end of the 25 year period, any remaining balance would be forgiven.  

Did Judge Feeney Make Ms. Stevenson an Indentured Servant?

When she came into bankruptcy court, Ms. Stevens had unpaid student loans stretching back to 1983. Instead of discharging her debt based on undue hardship, Judge Feeney concluded that Ms. Stevenson should participate in a federal repayment program that would obligate her to pay a percentage of her income toward her debt for 25 years.

If Ms. Stevenson goes on the ICRP, she will be nearly 80 years old when her payment obligations cease.  By that time she will have been burdened with student-loan debt for well over half a century.

Solutions?

It seems to me that the Income Contingent Repayment Plan, which Judge Feeney endorsed for Janice Stevenson, is nothing more than a modern version of indentured servitude, whereby student-loan debtors like Ms. Stevenson pay a portion of her income to student-loan creditors for the balance of her working lives.

The federal student loan program is out of control, and the Income Contingency Repayment Plan is making life harder for overburdened student-loan debtors, not easier.

Congress needs to do two things. First, it should amend the bankruptcy laws to allow insolvent student-loan debtors to discharge their debts in bankruptcy just like any other overburdened debtor.

Second, Congress should pass legislation abolishing the ICRP option for stressed out student-loan debtors. People who are insolvent deserve the fresh start that bankruptcy is designed to give them. They don’t deserve to be saddled with a 25-year repayment plan that will cripple them financially for the rest of their working lives.

References

In re Stevenson, 463 B.R. 586 (Bkrtcy. D. Mass. 2011).

Tuesday, April 10, 2012

The Pepper Spray Incidents at UC Davis and Santa Monica College: Universities Need to Listen to Students' Concerns about the Rising Cost of a College Education

Earlier this month, campus police at Santa Monica College pepper-sprayed more than two dozen students who were trying to enter a Trustees meeting to protest a tuition hike.  Chui L. Tsang, the college’s president, defended the police officers’ conduct, insisting that police used appropriate restraint and did not arrest anyone.  (Rivera, 2012).
Last fall, campus police at UC Davis pepper-sprayed students who were peacefully participating in an Occupy Wall Street demonstration. A video of this incident, posted on You Tube, shows a helmeted police officer calmly pepper spraying students who are passively huddled on a campus sidewalk.
What’s going on here?  Don’t colleges realize that students are the customers? Don’t they understand how bad they look when people view these incidents on You Tube? How many UC Davis students and Santa Monica College students who witnessed their classmates being pepper sprayed are going to donate money to their alma maters after they graduate?
Campus police should not pepper spray anyone—student or nonstudent—who is not behaving violently or physically threatening other people.  The students at UC Davis and Santa Monica College were not behaving violently (although some of the Santa Monica College students were a bit rowdy), and they should not have been pepper sprayed. 
Instead of pepper spraying their students, colleges and universities should listen to student protests about the rising cost of tuition and burgeoning student-loan debt; and they should demonstrate that they are taking action to address their students’ concerns.
What should they be doing?
  • First, colleges and universities should stop raising tuition while they continue paying extravagant salaries to college presidents and senior executives. They should freeze or reduce the salaries of their highest paid employees—at least until the national economy recovers-- instead of tacking the cost of these excessive compensation packages onto students’ tuition bills.
  • Second, college and university trustees should cap tuition and fees until the economy improves, and they should work harder at making their institutions more efficient.
  • In addition, higher education should demonstrate their empathy for overburdened student-loan debtors by urging Congress to amend the Bankruptcy Code to give overburdened student-loan debtors reasonable access to the bankruptcy courts. They should also support legislation that would stop the federal government from garnishing the Social Security checks of elderly people who defaulted on their student loans. 
The cost of higher education is out of control, total student-loan indebtedness approaches one trillion dollars, and student-loan default rates are alarmingly high. Colleges and universities need to show students that they are helping to solve these problems.  Pepper spraying student protesters is the wrong thing to do.
References
Rivera, C. (2012, April 4). College president defends pepper spray against 'unlawful' crowd. Los Angeles Times. http://latimesblogs.latimes.com/lanow/2012/04/students-unlawful-pepper-spray-santa-monica-college-president.html