Steve Rhode points out that wholesale forgiveness of student loans is impossible. Bankruptcy Relief for distressed college debtors is the best option

 Millions of words have been written about the student loan crisis. Heck, I've probably written a couple of million words about it myself. 

For my money, Steve Rhode's succinct and cogent essay, published yesterday, is the best analysis of this catastrophe. Mr. Rhode explains why massive student-loan forgiveness is a bad idea. Instead, he argues that bankruptcy relief is the better option. He also points out the fatal flaws in the federal student-loan program, which have brought us to the brink of calamity.

I urge you to read Steve Rhode's essay in its entirety.  My commentary will highlight a few key points.

First of all, Rhode points out that taking out student loans to pay for a college education was a mistake for millions of Americans. He cites a New York Life survey, which found that the average student-loan borrower took 18.5 years to pay off student loans, starting at age 26 and ending at 45.

That is a significant portion of life to have to be tied to a student loan payment that should have been directed to saving for retirement and then mushroomed into a giant nest egg. It can take decades to recover from that financial mistake. But that’s not the only financial regret people have.

Shockingly, millions of Americans took out student loans and never finished their degrees. For those people, student loans are a dead loss.  Instead of enhancing their economic future, dropouts shot themselves in the foot by taking out student loans.

Rhode also points out (as have many others) that the for-profit college industry has wreaked havoc among a population of Americans who took out student loans to attend for-profit schools. He cites a study by the Federal Reserve Bank of New York, which found that “[s]tudents who attend for-profit institutions take on more educational debt and are more likely to default on their student loans than those attending similarly selective public schools.”

The Federal Reserve Bank study then went on to say: "Overall, our results indicate that, on average, for-profit enrollment leads to worse student loan outcomes for students than enrolling in a public college or university, which is driven by higher loan takeup and worse labor market outcomes."

The federal student loan program is a mess. It is probably the worst public policy decision Congress ever made when it launched a program more than a half-century ago that now has more than 40 million people ensnared by a total of $1.7 trillion in outstanding student-loan debt.

But massive student-loan forgiveness is not a viable option. 

First of all, wiping out all that debt is fundamentally unfair. And here I will quote Steve Rhode's analysis:

As Howard Dvorkin, Chairman of  Debt.com said, “Only one-third of the people in this country get a four-year college education. The two-thirds without a college education is expected to subsidize their education when it is very likely that they earn less than the people who are receiving the educational subsidy.” 

As Mr. Dvorkin pointed out, “The issue of forgiving debt is complicated. What about all the people that have already struggled to pay their debts, and now other people get loans forgiven. That’s not fair.”

In any event, as Mr. Rhode explained, millions of people are already in a loan forgiveness plan. About 9 million people are in income-based repayment plans that allow them to make minimal loan payments that don't even cover accruing interest on their underlying debt.

So what is the solution to the train wreck we call the federal student-loan program? This is what Steve Rhode recommends:

I hate to state the obvious here, but rather than worry about the inequities of forgiveness and who wins and loses, the most rational and logical option is to roll back the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

It was this pernicious law that made even private student loans virtually nondischargeable in bankruptcy.  Many of the congresspeople who voted for this bill still hold elected office. They should be ashamed of themselves. 

Just as importantly, Mr. Rhode argues, Congress needs to remove the "undue hardship" language from the Bankruptcy Code and allow distressed debtors to discharge their college loans in bankruptcy like any other consumer debt.

Steve Rhode succinctly points out the merits of reasonable bankruptcy relief:

Returning to allowing both federal and private student loans to be discharged in bankruptcy has many features:

1.      It is a current and accepted legal process with clear rules and guidelines. 

2.      The debt is forgiven tax-free. 

3.      It allows people a chance to get a fresh start from an impossible situation. Oftentimes these issues are the result of accidents, injuries, medical issues, pandemics, etc. 

4.      A bankruptcy Trustee and Judge must review and approve the discharge plan. If a consumer has too much income for a full immediate discharge, they will be required to enter a five-year repayment plan in a Chapter 13 bankruptcy. 

5.      Forgiveness will be restricted to only those that qualify. 

6.      The fact the loans may now be dischargeable should force lenders to make better loan decisions before just handing the money to anybody. 

7.      If loans are less abundant or actually just based on repayment ability, then schools would have to ratchet back tuition fees. Less easy money would be available. 

8.      This process would be restricted to those who need and meet the accepted legal standards for bankruptcy. 

9.      People that can afford to repay their loans will have to do so through their Chapter 13 repayment plan.

10.  We can eliminate this ridiculous game and administration of student loans that will never be repaid and have to be dealt with.

As I said at the beginning of this commentary, I urge people to read Steve Rhode's article in its entirety. I agree with him completely.

Let's see what Congress does in the coming months. The way out of the nightmare is to amend the Bankruptcy Code.  Various student-loan forgiveness scenarios will not fix this enormous problem. 

If loan forgiveness is the best idea Congress has to offer, then our nation's political leaders will have opted for the status quo. And the status quo will ultimately destroy our nation's colleges and universities along with the lives of millions of student-loan debtors. 

COVID-19 is disrupting American higher education: That's a good thing

The coronavirus pandemic hit American higher education like a Cat 5 hurricane.   Virtually all colleges and universities shut their campuses down and switched from face-to-face instruction to a distance-learning format.

Many students didn't like the change and didn't like paying full tuition for a watered-down learning experience.  Lawsuits were filed. I myself was skeptical about the quality of online instruction.

However, I am teaching my second class as an adjunct professor using Zoom, and Zoom works great for me.   I can see my students on my computer screen and can talk to them directly, just as if we all were in the same room. To my surprise, I can teach via Zoom with no loss of quality.

In fact, I am beginning to think COVID-19 may be a blessing in disguise for American higher education. Here's why I take that view.

First, the latest generation of distance-learning technology (Zoom, Microsoft Teams, etc.) closes the gap between distance learning and live instruction. Colleges now have a good strategy for dealing with this pandemic and any future pandemic.

Second, COVID-19 has caused many college students to skip the dorm experience, and this shift has been a wakeup call to colleges that went on dormitory-building sprees. The change also put the brake on privately-financed, so-called luxury student housing. Privately and publicly financed student housing was out of control. All across the United States, universities are now surrounded by massive, block-housing units, which are a dispiriting blight on the landscape.

 Now that students are shying away from multiple-occupancy apartments and dorms, this speculative overbuilding has slowed down.  That is a very good thing.

Third, the massive shift of public universities to online learning has undercut the for-profit college industry, and that is also a good thing. The for-profits distinguished themselves by offering online education for working adults who could not attend classes on college campuses.  Often the quality of for-profit instruction was inferior, and for-profit colleges were almost always a lot more expensive than public colleges.

Now that the public colleges and universities have embraced distance learning, there is absolutely no reason for someone to enroll in the University of Phoenix or any other for-profit school that offers online instruction.  The for-profits are losing students and revenues, which (I hope) will force them to shut down. 

Finally, COVID-19 will stop the arms race among colleges to offer expensive recreational facilities, which have become a public embarrassment. LSU's "Lazy River" seemed like a cutting-edge innovation when it was built, but what college would install one now?

COVID-19 will force many small liberal arts colleges to close, which is unfortunate. But this country has too many colleges, and we are long overdue for a pruning process.

American universities are discovering that they can offer instruction in a distance-learning format, and those fancy recreational facilities and "luxury" student dorms are not essential. Maybe high-quality online learning will help higher education can get back to its real mission--which is to offer worthwhile educational experiences that prepare young people to become intelligent, civic-minded, productive citizens.  Wouldn't that be a good thing?

What? No Lazy River?

Joe Biden's student-loan forgiveness is seriously flawed, but it is a step in the right direction

Joe Biden announced his plan for student-loan forgiveness in a Medium commentary posted a few days ago.  He proposes to forgive all federal student loans for persons who earn up to $125,000 a year and who acquired their loans to attend a community college, a public college or university, or an HBCU (historically black college or university).

Biden's debt forgiveness plan is a step in the right direction, but it is seriously flawed.

First, Biden's plan does nothing for people who racked up student debt to attend for-profit colleges. We've known for a long time that the for-profit college industry has preyed on disadvantaged populations--people from low-income families, minorities, and first-generation college attendees.  On average, students leave their for-profit institutions with more debt than they would have acquired had they attended a public university.

So why not extended student-loan forgiveness to people who took out loans to attend a for-profit institution?

Second, student debtors who enrolled at private universities get no relief under Biden's plan unless they attended a private HBCU. This makes no sense to me at all.

Why should students who studied at Xavier University, a Catholic university in New Orleans, get debt forgiveness, while students who attended Loyola University, another New Orleans Catholic school, receive no relief at all? Are students who attended HBCUs more worthy of assistance than students who attended other colleges and universities? I don't think so.

Finally, Vice President Biden's proposal gives no relief to people who took out private student loans. Let's remember the fact that the so-called Bankruptcy Reform Act of 2005 explicitly made private student-loans virtually nondischargeable in bankruptcy.  Then-Senator Biden supported that bill and voted for it.

Why should a student who took out student loans from Wells Fargo or Sallie Mae be denied debt relief while students who took out federal loans get their student debt completely wiped out?

I support any legislation that brings assistance to overburdened student debtors--including plans proposed by Senator Sanders, Senator Elizabeth Warren, and former VP Biden.  So Biden's plan, imperfect as it is, has my support.

But wouldn't be simpler and fairer to amend the Bankruptcy Code and allow beaten down debtors to shed their student loans in bankruptcy like any other nonsecured consumer debt--regardless of where they went to college?

After all, the bankruptcy judges have the authority and the expertise to reject bankruptcy claims that are fraudulent or brought by people who have the financial means to pay back their lawful debts.

In my view, Biden's student loan relief plan is not well thought out. If implemented, it will ignite bitter resentment from people who are burdened by college loans taken out to attend private universities or for-profit colleges. And it will undoubtedly offend people who took out private student loans that are nondischargeable in bankruptcy because of a law Joe Biden helped enact back in 2005.

Joe Biden wants to forgive your student loans if you attended this Catholic university but not if you attended another Catholic school located in the same city.

Things are falling apart for American higher education: It is time to be cautious about taking out student loans

Things are falling apart for many American colleges and universities. The signs of stress and turmoil are everywhere.

First, college enrollments are down significantly, putting an enormous strain on colleges that are heavily dependent on tuition revenue. Over the past decade, college enrollment dropped by more than 2 million students, dipping below 18 million students in the fall of 2019.

Second, the for-profit college industry is on the verge of collapse. According to Forbes, the number of for-profit institutions declined by 25 percent between 2010 and 2018, and total enrollment dropped by half.

Third, private nonprofit colleges are closing at an accelerating rate. An analysis in The Chronicle of Higher Education reported that more than 50 small private colleges have closed since 2016.  Already this year, MacMurray College and Nebraska Christian College have announced they are shutting down.  And Notre Dame de Namur University stated that it will not enroll a first-year class this fall. 

Fourth, small liberal arts colleges are slashing tuition for their first-year classes by 50 percent. Although most small colleges post a very high sticker price, in reality, they are giving out financial aid and scholarships like candy. As a result, the average net cost of tuition is only half the posted price.

Fifth, business schools and law schools have rolled out new types of graduate degrees to counteract declining enrollment.  Business schools have introduced one-year MBA degrees because the demand for traditional two-year programs has dropped. And law schools have started offering law-based degrees for people who do not intend to practice law. According to numbers released by the American Bar Association, 14 percent of law school students were in non-JD programs in 2018.

Sixth, the coronavirus crisis has caused some college students to feel less positively about their educational experience.  The COVID-19 pandemic forced the vast majority of colleges to cancel face-to-face classes this spring and replace them with online instruction.  Unfortunately, the quality of online teaching has often not been good.  A recent survey found that 63 percent of undergraduate respondents reported that the quality of their online instruction was "worse" or "a lot worse" than the live teaching they received before the pandemic.

More than 40 percent of the undergraduate respondents said that their view of their college had gotten worse as a result of COVID-19. And one out of 10 high school seniors who had intended to enroll in a 4-year college this fall said their plans will likely change. 

Seventh, student debt has doubled from $750 billion in 2010 to $.15 trillion in 2019. Today, 45 million Americans hold student loan debt.  More than one million people defaulted on their student loans last year. Almost 9 million more are shackled by long-term, income-based repayment plans that can last as long as 20 or 25 years. 

Conclusion: Students should do everything possible to avoid taking out student loans

For three decades, colleges and universities raised tuition on an annual basis at twice the national inflation rate. College students financed the rising cost of their education by taking out larger and larger student loans.

College leaders assured students they were getting good value for their tuition dollars. After all, they purred soothingly, salaries for college graduates vastly exceed the wages of people without college degrees. Taking out student loans to get a college degree seemed like a smart investment.

In fact, inflation-adjusted salaries for American workers have remained flat for the last 40 years. "[T]today's average hourly wage has just about the same purchasing power it did in 1978." The wage gap between college graduates and non-college graduates has widened, but this is mostly because wages for non-college graduates have declined.

In other words, a college degree may be a good investment for most Americans. Still, it may not be as good as the colleges have represented.  People who take on enormous student debt to get liberal arts degrees or graduate degrees will find that their college education was a terrible investment if they do not land a good job.

The coronavirus pandemic has put millions of Americans out of a job. Experts predict an unemployment rate of more than 30 percent—higher than during the Great Depression of the 1930s.  Forty million Americans may be out of a job by the end of this year.

Our economy will bounce back, but who knows when that will be? So if you are thinking about going to college or graduate school, let me give you a little advice:

Now is not the time to take out massive student loans to finance a bachelor's degree in gender studies from an expensive private college.

Now is not the time to finance a luxury apartment with your student loan checks.

And now is not the time to thoughtlessly take out loans to enroll in a master's degree program without a clear sense of how that program will increase your income. 

It is a terrible thing to be unemployed—as millions of Americans will soon be. But it is far worse to be unemployed and burdened with student loans that you will never be able to repay.

What the hell? Financing a Harley at 22 percent interest!

Steve Rhode, the Get Out of Debt Guy, answers questions from his blog-site readers about consumer complaints. A few days ago, a woman named Mary wrote Steve about a Harley Davidson motorcycle her husband bought and financed at an interest rate of 22 percent.

Mary asked Steve if it was legal to apply an entire monthly loan payment to interest just because the payment was a few days late. She also asked if her husband could simply return the motorbike.

Mr. Rhode gave her good advice.

First of all, he pointed out, most loan payments typically go primarily to interest in the early months of the repayment period. "This is especially true," Mr. Rhode added, "if the outstanding balance includes late fees that get added to the account balance.

Taking the Harley back to the dealer, Mr. Rhode advised, is usually a bad option because a voluntary repossession will lead Mary and her husband with a big bill. The couple could sell the bike but they would need to sell it for at least enough to cover what they owe or come with the difference between the sales price and what they owe. Otherwise, they could not get the title to transfer.

Rhode then went on to estimate what the Harley is going to cost Mary and her husband if they continue with their repayment plan. Assuming, they financed the bike with a 72-month note, monthly payments would be $628 a month for 72 months. When they paid off the note after six years, they would have made payments totally $45,000 to pay off a $25,000 purchase.

Since Mary and her husband seem willing to just to give the bike back to Harley, they obviously realize they made a bad deal. They would have been better off to have saved enough money for a hefty down payment so they could have taken out a smaller loan. And assuming they had good credit, they could have financed the bike with a credit card at a lower rate of interest.

Some people reading Mary's story might conclude that she and her husband made a bad decision and have no one to blame but themselves. But I disagree. In a fairer and more just economy, laws and regulations would have prohibited this very bad transaction.

People forget that not too long ago, states had usury laws that placed strict limits on the interest that could be charged for a consumer transaction. In the state where I practiced law, a statute limited the interest rate to 10.5 percent--less than half the rate that Mary and her husband were charged.

But the banks figured out how to base their operations in states that permitted very high interest rates. Remember sending those credit card payments to South Dakota or Delaware? Then, in 1978, the Supreme Court allowed out-of-state credit card companies to charge interest rates that were higher than the interest rate allowed in their customers' own states. (Pat Curry explains this in a 2010 essay.)

Even student-loan debtors can fall into the trap of paying high interest rates. I've read a couple of recent bankruptcy court decisions in which people refinanced their student loans at 9 percent--a hefty rate indeed when we consider that the interest rate on a 10-year treasury bond is less than 2.7 percent right now.

Tragically, millions of Americans are financing consumer transactions to purchase stuff they don't need or is virtually worthless. This is also true for people who take out student loans to attend for-profit colleges that are not providing students with fair value--or any value at all in many cases.

As the 2020 political season heats up, voters need to ask presidential candidates if they endorse legislation that would effectively regulate consumer transactions and the student-loan industry. If a candidate has nothing to say about the massive exploitation of ordinary Americans by the banks, the student-loan racket, and the consumer-finance industry, voters need to find someone else to vote for.

Photo credit: Harley Davidson

Department of Education's Heightened Cash Monitoring List: Students should check to see if their college is in financial trouble

Steve Rhode performed a valuable public service last month when he published the U.S. Department of Education's most recent Heightened Cash Monitoring List.  This is DOE's list of schools that have various financial concerns, including accreditation problems or missing audits, as well as schools that are on financially shaky ground.

DOE does not make the list easy to review. I could discern no organizational pattern. Public schools, private nonprofits, proprietary schools, and foreign schools are all listed together. In total, there are more than 500 schools on the list.

Not surprisingly, more than half the schools with financial concerns are proprietary schools--a total of 275 for-profit institutions.  A good share of these schools are devoted to hairstyling or beauty. Forty-six schools on DOE's HCM list have the word Beauty or Cosmetology in their names; and there are three massage schools on the list.

The list also includes a large number of private, nonprofit colleges or universities: 128 schools in all. A fair number have religious affiliations. Seven schools on the list have the word Baptist in their name, and three school names include the word Wesleyan, indicating a Methodist affiliation.  Twelve colleges have the word Christian in their titles, and there were several other schools with names suggesting a religious connection: Bethel, Bethany, Bible, Seminary, etc.

DOE listed 35 foreign colleges and universities on its Heightened Cash Monitoring List. You might find it surprising that the federal government is funding foreign study at the same time the national parks are closed, but it does. Among the 35 foreign schools with various financial concerns are Hebrew University of Jerusalem, Universiteit Van Amsterdam in the Netherlands, University of Aukland in New Zealand, Centro De Estudios Universitarios Xochicalco in Mexico; and Poznan University of Medical Sciences in Poland.

DOE's list includes a category of schools with high student-loan default rates. Schools with a three-year default rate of 40 percent and schools that have a three-year default rate of at least 30 percent for three years are ineligible for federal student-aid money. 

Remarkably, none of the 500 plus schools on DOE's HCM list were flagged for having a high student-loan default rate. How could that be when Secretary of Education Betsy DeVos herself said that only 24 percent of student borrowers were paying down the principal and interest on their loans?

In my view, DOE's HCM list under reports the number of American colleges and schools that are in financial trouble. Nevertheless, the list is useful. 

First, the list confirms that a large number of small, private nonprofit colleges are in trouble, including many with religious ties. 

Second, we can see from the list that the largest share of financially troubled schools are for-profit institutions.

Finally, the list is a reminder that the U.S. Department of Education is loaning money for Americans to go to school overseas, which seems insane given the excess capacity in American higher education.

Of course not all schools on DOE's HCM list are experiencing serious financial problems. Some are on the list due to accrediting issues, inadequate administrative support, or audit irregularities. Nevertheless, all  postsecondary students should check the list to see if their school is on it. And parents who are helping their children decide where to go to college should also check the list. No one wants to enroll in a college that may close before the student graduates.

References

Rhode, Steve. Schools on the Warning List by the Department of Education--December 2018. Get Out of Debt Guy (blog), December 26, 2018.

A Deep Dive Into the Debtor Blaming 2018 Borrower Defense to Repayment Regulations. Essay by Steve Rhode

By Steve Rhode (originally posted on July 25, 2018)

Today the Department of Education (ED) has released their new rules for the program so let’s jump in and see what the Borrower Defence to Repayment program now looks like. I’m going to read the 433 pages so you don’t have to.The Department of Education put a hold on forgiving federal student loans for students who were victims of fraud by the schools that enrolled them. Under the Obama administration, the program would suspend collections activity while claims were being investigated and total forgiveness was a possible outcome.

Under the Trump administration claims were not approved and the rules were changed to only allow a partial forgiveness for most debtors based on an impractical standard.

It appears ED is trying to shift the responsibility for making good decisions for enrolling in questionable schools by pushing that obligation and blame on the student. The new rules say, “The goal of the Department is to enable students to make informed decisions on the front end of college enrollment, rather than to grant them financial remedies after-the-fact when lost time cannot be recouped and new educational opportunities may be sparse. Postsecondary students are adults who can be reasonably expected to make informed decisions and who must take personal accountability for the decisions they make.”

While ED says educational institutions should not mislead the students and “remedies should be provided to a student when misrepresentation on the part of an institution causes financial harm to that student,” let’s see how much power and practicality those remedies have.

The ED again turns back to putting the responsibility and blame on the student for enrolling in the wrong school that may have misled them. ED says, “students have a responsibility when enrolling at an institution or taking student loans to be sure they have explored their options carefully and weighed the available information to make an informed choice.”

But what seems to be missing from that lofty goal is some sort of pre-screening by the school to review the cost of the education and the expected salary for the chosen field. For example, the other day I wrote about the $90,000 associates degree in web design. Does the school have a responsibility to sell a fair product or is the responsibility now focused on the student for believing the hype?

ED says, “The Department has an obligation to enforce the Master Promissory Note, which makes clear that students are not relieved of their repayment obligations if later they regret the choices they made.” So if your 18-year-old self made a bad choice of schools that provided an overpriced education with little value, that’s your own damn fault.

The proposed rule document says, “As of January 2018, it had received 138,989 claims, of which 23 percent had been processed.” Some of these claims go back more than a year.

It is quite possible those became a major issue with the new ED because Borrower Defense Claims were being submitted and approved. These claims were not approved on no basis but because students had been misled or deceived by the school.

But here is where ED is turning the table on debtors, “the Department is concerned that several features of the 2016 final regulations might have put the Department in the untenable position of forgiving billions of dollars of Federal student loans based on potentially unfounded accusations. Specifically, those regulations would allow the Department to afford relief to borrowers without providing an opportunity for institutions to adequately tell their side of the story.”

These new rules say, students who feel they were misled and deceived by schools to get them to enroll and take out federal student loans, may still submit claims but as long as they are “not in a collections status.” So students who were saddled with questionable loans by a questionable school will have to continue to make monthly payments or stay out of collections while their claim is processed for an undetermined amount of time.

ED wants to encourage students to enroll in income-driven repayment plans and make payments on their loans. These would be the same plans that put people into decades-long repayment plans with potentially big tax bills at the end. Balances in these programs go up, not down, as the monthly payment is insufficient to cover the interest building.

ED is worried that students claiming they were harmed by their schools will strategically default on their otherwise unaffordable debt. As evidence to support this concern, ED cites research by those who intentionally defaulted on their mortgage payments to take advantage of mortgage modifications. Talk about apples and oranges here.

“The Department is trying very carefully to balance relief for borrowers who have been harmed by acts of institutional wrongdoing, with its obligation to the taxpayer to provide reliable stewardship of Federal dollars.” And while that might be true, then why isn’t the Department limiting access to federal funds by schools that engage in questionable practices?

Those questionable practices have led to massive amounts of unaffordable student loan debt sitting in a non-payment status. The lack of oversight by ED to rein in the access to federal student loan dollars by typically for-profit schools who have been approved by questionable accreditation.

So ED says, “With more than a trillion dollars in outstanding student loans, the Department must uphold its fiduciary responsibilities and exercise caution in forgiving student loans to ensure that it does not create an existential threat to a program that lacks typical credit and underwriting standards.”

But where were the underwriting standards for schools selling degrees that students would never be able to afford to repay? Where was the fiduciary responsibility for ED and student loan debtors?

ED appears to say they are not going to get involved in resolving disputes or claims of wrongdoing against schools. That is going to be left up to the individual student to fight with the school through the courts. How students will be able to afford to do that, is a mystery.

And ED is not going to block schools from forcing students into secret arbitration or stopping schools from allowing students to enter class action suits against the schools. Instead, ED says in its press release on the rulemaking “that institutions requiring students to engage in mandatory arbitration or prohibiting them from participating in class action lawsuits provide plain language explanations of these provisions to enable students to make an informed enrollment decision.” So students who decide to go to schools that block access to courts to remedy claims were stupid to enroll.

Here is what the rule says, “it seems reasonable that consumer complaints should continue to be adjudicated through existing legal channels that put experienced judges or arbitrators in the position of weighing the evidence and rendering an impartial decision.”

Even with the Borrower Defense to Repayment program in place, ED again takes the step to say the student was the idiot in this situation when they enrolled at a school they believed. ED says, “As stated in the Master Promissory Note the borrower signs when initiating their first loan, the borrower is expected to repay the loan even if the borrower fails to complete the program or is dissatisfied with the institution or his or her outcomes.”

On the issue of a group discharge of federal student loans if a school is found to have engaged in “a misrepresentation made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth,” ED punts and says that will be the focus of a different rule. This appears to close the door for bulk discharges of schools found guilty of deception, like in the Corinthian Colleges case.

As evidence why the group discharge would be harmful to students, ED says “Because an institution can refuse to provide an official transcript for a borrower whose loan has been forgiven, group discharges could render some borrowers unable to verify their credentials or work in the field for which they trained and have enjoyed employment.” Maybe the real answer is that is a school was found to deceive students they should still have to provide a transcript.

In the past, schools who enrolled students who never graduated from high school or had a GED could be found to have taken advantage of people who may not have been qualified to enroll in higher education. The proposed rule shifts the burden back to the uneducated student when it says, “We also propose changes to the Department’s current false certification regulations. The Department believes that in cases when the borrower is unable to obtain an official transcript or diploma from the high school, postsecondary institutions should be able to rely on an attestation from a borrower that the borrower earned a high school diploma since the Department relies on a similar attestation in processing a student’s Free Application for Federal Student Aid (FAFSA).”

Where is the underwriting in this process that ED says it engages in?

These new rules would apply to federal student loans first disbursed on or after July 1, 2019.

They would also “require a borrower to sign an attestation to ensure that financial harm is not the result of the borrower’s workplace performance, disqualification for a job for reasons unrelated to the education received, a personal decision to work less than full-time or not at all, or the borrower’s decision to change careers.”

Feel free to read the entire document, here.

My impression of the proposed new rules is the Department of Education wants to shift all the responsibility for falling for school marketing overpriced education to the least informed person in this transaction, the student.

It doesn’t take a crystal ball to see how this is going to work out. Badly for debtors.

If ED is worried about underwriting and a fiduciary responsibility then why are they passing out easy loans with little regard to affordability, to begin with? Does the government have a duty to protect it’s citizens or does it need to protect its poor financial decision making and schools they pump loans through? Or is this new policy all about blaming the victim instead of investigating the claims for validity?

Steve's essay was originally posted on The Get Out of Debt Guy web site.

*****

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here. 

Dear taxpayers: I hope you approve of New York University's lavish compensation policy because you are paying for it

American Enterprise Institute's report on graduate schools with low rates of graduate-student repayment included a list of 20 universities where graduate students had above average non-repayment rates ranked by the amount of student loans graduate students took out. New York University is at the top of the list.

According to AEI's analysis, the 2009 cohort of NYU graduate- and professional-school students had amassed $1.135 billion in student loans. That's right: billion with a B. Five years later, more than a third of those students (34 percent) had not paid down their student loans by one dime.

New York University, you may recall, has been criticized for its lavish compensation packages for senior executives.  NYU won't disclose how much it is paying Andrew Hamilton, its current president. But John Sexton, Hamilton's showy predecessor, made $1.5 million in 2012-2013.  He retired with $800,000 in annual retirement income and a "length-of-service" bonus of $2.5 million.

Surely Hamilton is making as least as much as Sexton did. And NYU graciously updated Hamilton's penthouse apartment in Greenwich Village. How much did that cost? NYU won't say.

How does NYU manage to pay its executives so much? Does it have a large endowment? Not particularly.  NYU's total endowment funds amount to only $4.1 billion, about one ninth the size of Harvard's ($35.6 billion).

NYU gets a lot of its revenue from federal student loans. As just noted, graduate students in the 2009 cohort borrowed over $1 billion. That would be OK with taxpayers if NYU's graduate students paid back what they owe. But a lot of them are not.

AEI's list of universities with below average repayment rates for graduate students reveals that the top 15 schools with high levels of student-loan debt and below average rates of repayment are all private universities. Here's the list, along with the percentage of graduate students in the 2009 cohort who had not reduced the principal of their loans by even a dollar after 5 years.

New York University (34%)
University of Phoenix (36%)
Nova Southeastern University (33%)
Walden University (33%)
Capella University (34%)
Argosy University (37%)
Rosalind Franklin University of Medicine and Science (51%)
Keller Graduate School of Management (DeVry) (34%)
Midwestern University (22%)
Webster University (34%)
Grand Canyon University (28%)
National University--La Jolla (26%)
Strayer University (49%)
Thomas M. Cooley Law School (29%)
Touro College-Main Campus Midtown (22%)

What is the annual compensation for the senior executives at these institutions? Who knows? As private institutions, these universities are not required to disclose their compensation packages. But you can bet it is in the high six figures at all 15 universities.

So, Mr. and Ms. Taxpayer, I hope you approve of the federal government's student-loan program, which is shoveling money to private universities, because you are paying for a lot of lavish spending. Graduate students in particular are borrowing extraordinary amounts of money, and a high percentage of them have not paid any of it back five years into the repayment phase of their loans.

NYU president Andrew Hamilton:
Thanks, America! I love my swell penthouse apartment!

References

Jason Delisle. Graduate Schools with the Lowest Rates of Student Loan Repayment. American Enterprise Institute, June 2018.

Abby Ohlheiser. John Sexton will officially leave NYU in 2016. Atlantic, August 14, 2013.

Barbara Erkson v. U.S. Department of Education: A 64-year-old woman, struggling to make ends meet, discharges $107,000 in student loans in bankruptcy

Barbara Erkson, an unmarried 64-year-old woman, filed an adversary proceeding in a Maine bankruptcy court  in an attempt to discharge $107,000 in student loans in bankruptcy. The U.S. Department of Education and Educational Credit Management Corporation (ECMC) vigorously objected, but Judge Peter Carey rejected their heartless arguments and granted Ms. Erkson a full discharge.

This is Ms. Erkson's story as told by Judge Carey. In 1998, when she was in her forties, Erkson enrolled at Vermont College of Norwich University to pursue a Bachelor of Arts in Interdisciplinary Studies. She took out student loans to finance her studies and graduated in 2002 with considerable debt.

After graduating, Erkson worked at various community agencies in order to obtain the conditional licenses necessary to work as a licensed counselor. From 2002 through 2008, she worked at a private counseling service, but her job was terminated due to funding constraints. At some point she defaulted on her undergraduate loans.

Erkson then entered graduate school at Salve Regina University, and she obtained a master of arts degree in Holistic Counseling in 2011. Thereafter she held a series of counseling jobs and maintained a private practice, but she did not make enough money to sustain herself and pay back her student loans.

The U.S. Department of Education and ECMC objected furiously to releasing Erkson from her student debt. She had not shown good faith, they said, because she had not agreed to enter a long-term income-based repayment plan.  They also objected to some of Erkson's expenses. She should not have hired a dog walker, they contended. Nor should she be leasing an automobile. They even criticized her for going to graduate school since her master's degree did not improve her income level.

Fortunately for Barbara Erkson, Judge Carey is a compassionate man; and he waved aside all her creditors' cold-hearted objections.

Plaintiff impresses the Court as a hard-working woman who chose an area of study which, due to changes in federal laws and regulations, proved less profitable than she anticipated. If the Court applied such stringent standards to all student loan challenges, anyone who failed to correctly read the tea leaves of the future and incurred student debt in an area that technology, societal preferences, or legislation later made obsolete would be ineligible for a discharge. The [Bankruptcy] Code simply does not go so far. 

Judge Carey rejected the creditors' argument that Erkson handled her loans in bad faith. They pointed out that her loans were almost always in deferment, forbearance or in default and thus she had made relatively few loan payments. Nevertheless, Judge Carey wrote, "neither DOE nor ECMC challenged [Erkson's] testimony that she struggled to find full time work until 2002 or that, from 2002 until 2008, she did not generate sufficient income to maintain a minimal standard of living and repay her student loans." In Judge Carey's opinion, Erkson's failure to make any meaningful loan payments was "the result of her meager income and not evidence of bad faith."

Interestingly, Erkson argued that she suffered from a hearing impairment that hindered her efforts to find and keep a good job. Judge Carey accepted Erkson's testimony on that point, but he made clear his decision did not turn on Erkson's health situation. Her current financial condition and future economic prospects entitled Erkson to a bankruptcy discharge of her student loans, the judge ruled, without considering her hearing impairment.

What are we to make of the Erkson decision?

First, DOE and ECMC are bullies. Both agencies almost always oppose undue-hardship discharges for distressed student-loan debtors, regardless of individual circumstances.  They always argue that debtors handled their student loans in bad faith and that they should be denied a discharge if they fail to sign up for a 25-year repayment plan. They always quibble about a debtor's routine expenses and pore over a debtor's every expenditure in humiliating detail.

Second, the Erkson decision is a good one for millions of people who took out student loans to pursue careers that did not work out like they planned. How many people have enrolled in chicken-shit for-profit colleges, third-tier law schools, or overpriced professional programs only to learn their educational investments would never pay off?

In the eyes of the U.S. Department of Education and ECMC, DOE's corporate hit man, such people are losers; and their inability to pay back their student loans is prima facie evidence of bad faith.

But Judge Carey disagreed. People who make a sincere effort to find a good job and wind up unable to pay back their student loans while maintaining a minimal standard of living are entitled to bankruptcy relief: period. It's time DOE and ECMC get that message.

The Department of Education and ECMC are bullies.

References

Erkson v. U.S. Department of Education, 582 B.R. 542 (Bankr. D. Me. 2018).

The New York Times lambasts Republicans and Betsy DeVos for catering to for-profit colleges: The Gray Lady overlooks culpable Democrats

In an editorial last month, The New York Times lambasted Secretary of Education Betsy DeVos, the Trump administration and congressional Republicans for protecting the greasy for-profit college industry. "Try as they might," the Times observed, "the Trump administration and Republicans in Congress cannot disguise that they continue to do the bidding of the for-profit industry, which has saddled working-class students--including veterans--with crushing debt while providing useless degrees, or no degrees at all."

Indeed, the Times grumbled, the Department of Education, under DeVos, "has undermined investigations of the [for-profit college] industry by marginalizing or reassigning lawyers and investigators . . ." Major investigations, the Times reported, have been abandoned, including investigations into the activities of DeVry Education Group, Bridgepoint Education and Career Education Corporation.

The Times is right of course. Betsy DeVos is the shameless lapdog of the for-profit college crowd, which continues to prey on unsophisticated Americans seeking to get a worthwhile education.  The Times predicts that DeVos' behavior may come back to bite the Republicans in the upcoming midterm elections, and perhaps there will be repercussions at the ballot box.

But to be fair, servile obsequiousness to the for-profit colleges is bipartisan. Both Democrats and Republicans have taken campaign contributions from these bandits and both parties have succumbed to the blandishments of the for-profit lobbyists.

In fact, The Nation reported nearly five years ago that two Democratic congressmen were leading an effort to protect for-profit colleges from meaningful regulation.  According to The Nation's reporter Lee Fang, Representative Rob Andrews from New Jersey and Florida congressman Alcee Hastings had taken thousands of dollars from for-profit college executives and for-profit backed political committees.

Andrews is no longer in Congress, but Alcee Hastings is still in office. This is the same Hastings, by the way, who, while sitting as a federal district judge, was charged with bribery, perjury and falsifying documents.  The U.S. Senate impeached him and removed him from his judicial post in 1989.

If the Democrats want to distinguish themselves from their Republican colleagues, they need to speak out forthrightly about the for-profit-college scandal. In my view, the for-profit racketeers cannot be tamed through tougher regulations. The only way to stop these predators from stalking unsuspecting and naive young Americans is to shut the industry down. But the Democrats don't have the courage to speak out against the for-profit mobsters. They seem to hope Americans will overlook their silence about the the for-profit college industry and pin all the blame on the Republicans.

Rep. Alcee Hastings (D-Florida): Friend of the for-profit college industry

References

Editorial. Predatory Colleges, Freed to Fleece Students. New York Times, May 22, 2018.

Lee Fang. Two House Democrats Lead Effort to Protect For-Profit Colleges, Betraying Students and Vets. The Nation, December 13, 2013.

United States Senate.  The Impeachment Trial of Alcee L. Hastings (1989) U.S. District Judge, Florida.

Parent PLUS loans: African American families are being exploited by HBCUs

Rachel Fishman wrote a report for New America titled "The Wealth Gap PLUS Debt: How Federal Loans Exacerbate Inequality for Black Families."   But a better titled would have been this: "The Parent PLUS student-loan program screws African American families."

Parent PLUS is a federal student loan program that allows parents to take out student loans for their children's postsecondary education. Parents can borrow up to the student's total cost of attending the college of their choice--there is no dollar cap on the amount that parents can borrow.

Originally, the Parent PLUS program had very low eligibility criteria, and the Department of Education was making loans to parents who had a history of bad debts. DOE tightened the criteria in 2011, which raised an outcry from HBCUs (Historically Black Colleges and Universities).

HBCUs favor Parent PLUS loans because DOE does not report default rates on these loans and does not penalizes colleges for high Parent PLUS default rates.  As Fishman explained, "Parent PLUS loans are not included in CDR [cohort default rate] calculations, rendering them a no-strings-attached revenue source for colleges and universities" (P. 9). Indeed, for many colleges, "Parent PLUS loans are like grants; they get money from the federal government and the parent is on the hook to repay."

In response to strenuous protests from HBCUs, the Obama administration backed off on its efforts to make borrowing standards more rigorous, and the amount of money parents borrow under the program has increased.  According to Fishman, the percent of Parent PLUS borrowers with debt over $50,000 increased from 3 percent in 2000 to 13 percent in 2014 (p. 19).

Basically, the Department of Education is toadying to the HBCUs by loaning money recklessly to African American families that probably can't pay it back. In fact, Fishman reported that one third of African American parents taking out PLUS loans had incomes so low they were able to make zero estimated family contributions (EFC) to their children's college costs.

As Fishman points out, Parent PLUS loans adds to  a family's total debt for putting a child through college. Black families with zero EFC accumulate an average of $33,721 in "intergenerational indebtedness," which includes an average of $11,000 in PLUS loans in addition to the amount borrowed by the students themselves.

Fishman's report adds to a growing body of evidence showing that African Americans are getting screwed by the federal student loan program. Ben Miller, writing for the Center for American Progress (as reported by Fishman) "found that 12 years after entering college, the median Black borrower owed more than the original amount borrowed."  And default rates for African American college graduates is almost triple the rate for white graduates: 25 percent for black graduates and only 9 percent for white graduates.

A Brookings Institution report also calculates high default rates for black student borrowers. Judith Scott's Brookings report estimates that 70 percent of African American borrowers in the  2003-2004 cohort will ultimately default.

And the student-loan default rate for African Americans who drop out of for-profit schools without graduating is catastrophic.  Three out of four black students who borrow money to attend a for-profit institution and drop out before graduating default on their student loans.

But who gives a damn if the federal student loan program screws African American students and their families? HBCUs like the Parent PLUS program, because the Parent PLUS default rate doesn't penalize the colleges.  Parent PLUS money is essentially "free money" to a HBCU although one third of African American families who take out these loans show zero ability to repay.

References

Rachel Fishman. The Wealth Gap PLUS. How Federal Loans Exacerbate Inequality of Black Families. New America.org, May 2018.

Andrew Kreighbaum. How Parent Plus Worsens the Racial Wealth Gap. Inside Higher Ed, May 15, 2018.