Showing posts with label income-based repayment. Show all posts
Showing posts with label income-based repayment. Show all posts

Sunday, September 30, 2018

Sue Reagan v. Educational Credit Management Corporation: "A camel whose back is already broken"

Sue Reagan is 60-years old and lives in a mobile home on rented land. She has a part-time job but lives near or below the poverty line. She took out student loans to obtain a bachelor's degree in administration of justice and a master's degree in criminology, but that was long ago.

Unable to pay back her student loans under a standard ten-year repayment plan, Reagan signed up for an income-based repayment plan (IBRP). Her income is so low, however--$1,286 a month--that her monthly payments are zero dollars.

Reagan filed for bankruptcy and brought an adversary action to discharge her student loans. She argued that her student loans constituted an undue hardship and that she could not maintain a minimal standard of living and pay back those loans.

Educational Credit Management Corporation, her creditor, filed a motion for summary judgment and asked the bankruptcy court to dismiss Reagan's case without a trial.  ECMC argued that since Reagan's monthly payments were zero dollars, she could not reasonably argue that her student loans constituted an undue hardship or that her loans forced her below a minimal standard of living.

But Bankruptcy Judge Gregory Taddonio disagreed with ECMC and refused to dismiss Reagan's case. In Judge Taddonio's view, it did not matter which debt drove Reagan to the edge of poverty. "If she finds herself financially underwater, the question of which obligation pushed her below the surface matters little. To a camel whose back is already broken, any straw in his pack is unwelcome."

Judge Taddonio looked at Reagan's financial information and noted that her expenses were $119 more than her income, which was less than $1,300 a month. Moreover, her expenses were reasonable--mostly going for basic necessities. Judge Taddonio said he could not identify any expenses that could be trimmed.

So Judge Taddonio allowed Sue Reagan's adversary proceeding to go forward. Will she ultimately prevail?

Who knows? ECMC's motion to dismiss was merely the first of many arguments ECMC will make to defeat Reagan's attempt to shed her student loans. And ECMC has unlimited resources. It can hound Reagan for years right up to the Third Circuit Court of Appeals.

But Reagan's initial victory is heartening, a sign perhaps that the federal bankruptcy judges have begun to acknowledge that the federal student loan program has destroyed the lives of millions of people, most of whom deserve bankruptcy relief.

Sunday, November 29, 2015

Liz Kelly, a school teacher, owes $410,000 in student loans--most of it accumulated interest. Will she ever pay it back?


Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.
Albert Einstein 
Liz Kelly, a 48-year old school teacher, owes the federal government $410,000 in student loans, which she will never pay back. How did that happen?

The New York Times article chronicled Kelly's story in this Sunday's Business Section, but the Times didn't adequately explain how Kelly got into this jam. My commentary for today is a forensic commentary on Kelly's situation.

Compound interest. As the Times story reported, Kelly didn't borrow $410,000 to finance her studies. She actually borrowed less than $150,000. Two thirds of her total debt is accumulated interest.

Albert Einstein observed that "[c]ompound interest is the eighth wonder of the world. He who understands it, earns it . . . he who doesn't . . . pays it." As Liz Kelly's story illustrates, most people don't understand Einstein's simple observation about compound interest any better than they understand his theory of relativity.

Over the years, Kelly took out student loans to pay for her undergraduate education, graduate studies, child care and living expenses. She also borrowed money to get a law degree, which she did not complete, and a Ph.D. from Texas A & M, which she also did not complete.

Her graduate studies enabled her to postpone making payments on her loans, but she continued borrowing more money; and the interest on her loans continued to accrue. Some of her loans accrued interest at 8. 25 percent--a pretty high interest rate. When her total indebtedness reached $260,000, she consolidated her student loans at 7 percent interest--still pretty high.

Over a period of 25 years, Kelly received a series of forbearances or deferments, and she never made a single payment on her loans. Thus, it is easy to understand how the total amount of her indebtedness tripled over the amount she borrowed.  In fact, as the Times pointed out, the annual cost of interest on her unpaid student loans is now larger than the total amount she borrowed for her undergraduate education!

Back in the old days, when people received interest on their savings, most people understood the principle of compound interest. People knew, for example, that money saved at 7 percent interest doubled in 10 years, and that money saved at 10 percent interest doubled in 7 years.

But no one gets interest on their savings any more, and perhaps that explains why many student-loan borrowers don't understand that their total indebtedness grows every year their loans are in deferment. Certainly Liz Kelly didn't understand this. The Times reported that she was shocked to learn that she owed $410,000.

No cap on student loans.  Although Kelly never made a single payment on her student loans, the federal government continued to loan her money. In fact, in 2011, she borrowed about $7,500 to pursue a Ph.D. in education, even though her total indebtedness at that time was more than a third of a million dollars and she had made no loan payments.

As the Times writer succinctly observed:
A private sector lender approached by a potential borrower with no assets, a modest income, and $350,000 in debt who had never made a payment on that loan in over 20 years would not, presumably, lend that person an addition $7,800. But that is exactly what the federal government did for Ms. Kelly. Legally it could do nothing else.
Obviously, a federal student-loan system that works this way is dysfunctional, irrational, and unsustainable. The feds should have shut off the student-loan spigot long before Kelly borrowed money to get a Ph.D.

The Charade of Income-Based Repayment Plans. If Kelly had accumulated $410,000 in consumer debt or a home mortgage, she could discharge the debt in bankruptcy. But discharging a student loan in bankruptcy is very hard to do. Indeed, Kelly might find it very difficult to meet the so-called "good faith" prong of the three-part Brunner test. After all, she continued taking out student loans over a period of 20 years and never made any loan payments.

Kelly's only reasonable escape from her predicament is to enroll in the federal government's loan forgiveness program, which would allow her to make payments based on a percentage of her income for a period of 10 years so long as she works in an approved public-service job. As a school teacher, she should easily qualify for this program.

But as Kelly herself pointed out, her monthly loan payments under such a plan would not even cover accumulating interest on the $410,000 she owes. At the end of her 10-year repayment program, her total indebtedness would be larger than it is now--easily a half million. That amount would be forgiven, leaving the taxpayers on the hook.

In fact, Kelly's situation is a perfect illustration for the argument that income-based repayment programs are not a solution to the student-loan crisis. Most people who participate in them--about 4 million people--will not pay down the principal on their loans.  Income-based repayment plans are really just a penance for borrowing too much money--say one Our Father and three Hail Marys and go and sin no more.

Conclusion

The Times story on Liz Kelly concluded with the observation that Kelly's story is unusual, but that's not really true. As the Times itself observed in a recent editorial, 10 million people have either defaulted on their loans or are in delinquency. The Consumer Financial Protection Bureau reported in 2013 that 9 million people were not making payments on their student loans because they had obtained a forbearance or deferment. And about 4 million people are in income-based repayment plans.

Thus, at least 23 million people have loans in the repayment phase who are not making standard loan payments. So what should we do?

1) First, the federal government should not loan people more money if they are not making payments on the money they already borrowed. No one did Liz Kelly any favors by loaning her an additional $7,500 when she had already accumulated indebtedness of $350,000 and didn't have a prayer of ever paying it back.

2) There needs to be some cap on the amount of money people can borrow from the federal student-loan program. I'm not prepared to say what the cap should be, but surely it is bad public policy to lend money so that people can accumulate multiple degrees that do not further their financial prospects.

3) We've got to face the fact that income-based repayment plans--favored by the Obama administration, the New York Times, and the Brookings Institution--are not a solution to the student-loan crisis. Surely it is pointless to put Kelly on a ten-year income-based repayment plan that won't even pay the interest on her indebtedness.

As unpalatable as it is for politicians and the higher education community to admit, bankruptcy is the only humane option for people like Liz Kelly.  Did she make some big mistakes in managing her financial affairs? Yes. But the federal government and several universities allowed her to make those mistakes; and the universities received the benefit of Kelly's tuition money.

No--we need to face this plain and simple fact: Kelly will never pay off that $410,000. And putting her in a long-term income-based repayment plan is nothing more than a strategy to avoid facing reality, which is this: the federal student loan program is out of control.

Image result for albert einstein
Compound interest: The eighth wonder of the world

References

Kevin Carey. (2015, November 29). Lend With a Smile, Collect With a Fist. New York Times, Sunday Business Section, 1. Accessible at: http://www.nytimes.com/2015/11/29/upshot/student-debt-in-america-lend-with-a-smile-collect-with-a-fist.html?_r=0

Editorial, "Why Student Debtors Go Unrescued." New York Times, October 7, 2015, A 26. Accessible at: http://www.nytimes.com/2015/10/07/opinion/why-student-debtors-go-unrescued.html

Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013.  Accessible at: http://www.consumerfinance.gov/blog/a-closer-look-at-the-trillion/

Wednesday, September 2, 2015

The Beginning of the End: Signs Are Everywhere that the Student Loan Program Is Collapsing

In the spring of 1940, just before the Battle of France, the people of Paris were enjoying themselves. As William Shirer wrote in The Collapse of the Third Republic:
The sands at Auteuil were full for the annual spring racing, and betting was heavy. Crowds flocked to the spring art exhibition at the Grand Palais. The cinemas and theaters played to full houses. The windows of the great jewelry shops in the rue de la Paix sparkled with diamonds and other gems, and inside business was good. (p. 604)
And then the Germans invaded the Low Countries and within a month the Nazis were in Paris.

When the party's over, it's over.
American  higher education, it seems to me, is behaving much as the Parisians did on the eve of their World War II disaster. Tuition goes up every year, even though the colleges offer steeper and steeper discounts just to lure students in the door. The average freshman now pays just 50 percent of a college's sticker price.

Meanwhile, the major public institutions of the South and Midwest pay their varsity football coaches $4 million and even $5 million a year to producing winning teams; and the assistant coaches often make a million dollars a year or more.

The campus book stores sell fewer and fewer books but make a profit selling junk.  Fewer books means more space to sell college-branded  t-shirts, sunglasses, and coffee mugs at outrageous prices. Most campuses now have a Starbuck, where students can buy elaborate coffee drinks for $5 a pop.

More and more, colleges and universities are outsourcing their student services. University employees no longer cook the meals.  Let them eat at Taco Bell, conveniently located in the Student Union. As a percentage of  total college enrollment, fewer and fewer undergraduates live in college dorms. Instead they flock to expensive, privately developed coed student-housing ghettos that provide undergraduates with swimming pools, game rooms, and plenty of space to park their late-model cars.

And why not? Student loans will pay for just about everything. And if the kids need more money than they can borrow on their own account, mom and pop will be glad to co-sign student loans at private banks. Total outstanding student-loan debt is now $1.3 trillion.

But it can't go on forever.

Almost 7 million people are currently in default on their loans, which means they haven't made a student-loan payment for more than a year. Millions more have obtained economic hardship deferments and aren't making student-loan payments.

More and more people have signed up for income-based repayment payment plans that stretch out the loan repayment period to as long as 25 years--3.9 million people, according to the Department of Education. That's a 56 percent surge in just one year.

DOE describes the uptick in long-term repayment plans as a victory because students' monthly payments go down. But many people in these plans are making payments so low they will never pay off their loans. And anyway, who wants to pay a percentage of their income for a quarter of a century just for the privilege of getting a crummy college education?

Nor is it clear that most people will stick with a long-term payment plan for 25 years. Not long ago, DOE reported that more than half of the people in those plans failed to report their annual income, a prerequisite for continuing in an income-based repayment program.

This house of cards is about to come tumbling down. Already, private liberal arts colleges are folding or on the verge of folding as students realize that it makes no sense to pay $40,000 or $50,000 a year to attend a nondescript private liberal arts college in nowheresville. Sweetbriar's debacle is just the first of many more college closings to come.

And the bloom is off the rose for the for-profits, which have been insanely profitable for the private equity groups and wealthy investors who own them. Corinthian Colleges' bankruptcy is but the harbinger of a major shakeup in the for-profit college industry.  And what happens to Corinthians's 300,000 former students, most of whom used student-loan money to pay their tuition? How many Corinthian alums will pay back their student loans?

There's only one solution to this giant economic disaster--reasonable access to bankruptcy for overburdened student-loan debtors. But DOE and its loan-collection agencies fight student-loan bankruptcies tooth-and-nail. DOE even opposed bankruptcy relief for a quadriplegic debtor who was working full time but couldn't make enough money to compensate his full-time caregiver and and still pay his fundamental living expenses (Myhre v. U.S. Department of Education, 2013).

DOE knows that if bankruptcy relief becomes an option for people who are swamped by their student loans that a flood of debtors will flow into the bankruptcy courts. If that ever happens, this enormous fraud on American young people will be exposed.

So colleges and universities waddle long, academic year after academic year, jacking up their tuition and hiring more and more bureaucrats and administrators.  College presidents hob nob with wealthy donors and watch the football games in executive sky boxes.  Tenured professors teach less and less, and low-paid adjuncts teach more and more of the college curriculum.

But the metaphorical equivalent of German panzer tanks are hiding in the shrubbery of our well-groomed college campuses. And some day soon, American higher education--the envy of the world our college leaders tirelessly assure us--will collapse.

References

Mitchell, Josh. School-Loan Reckoning. 7 Million Are In Default. Wall Street Journal, August 21, 2015.

Myhre v. U.S. Department of Education, 503 B.R. 698 (Bankr. W.D. Wis. 2013).

Shirer, William. The Collapse of the Third Republic. New York: Simon and Schuster, 1969.





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



Friday, September 5, 2014

The Fed's Easy Redemption Plan for Student-Loan Borrowers in Default: Another Sign that the Federal Student Loan Program is a Train Wreck

All of us know people who appeared to radiate good health, but in reality they were terminally ill. Maybe we had a friend with clogged arteries but didn't know it. Perhaps a colleague had pancreatic cancer that hadn't been diagnosed.  These people went about their lives as if they would live forever and then the diagnosis came and shortly after they were dead.

This is exactly the situation the Federal Student Loan Program is in. All across America, colleges and universities, both public and private, depend on federal student aid money to pay the bills. Yes, the student-loan default rate has doubled in recent years; and yes, the average amount borrowed goes up every year. And yes, a high percentage of college graduates are unemployed or under-employed and thus are unable to pay back their loans.

But, hey, no big deal. Colleges will continue to raise their tuition on an annual basis, and the government will continue loaning more and more money. But someday--and soon--those little signs of sickness will become symptoms of a terminal disease; and the whole Federal Student Loan Program  will come crashing down.

And here's one of those little signs of trouble that portend the coming disaster. The New York Times reported recently that the Department of Education has made it easier for student-loan borrowers who defaulted on their loans to rehabilitate their loan status.  All they have to do is make payments based on a percentage of their income. Under the new rules, borrowers can bring their loans back into good standing if they pay 15 percent of their income after subtracting 150 percent of the federal poverty level.  Borrowers who are unemployed or who are working at or near the poverty level won't have to pay anything.   

According to the New York Times, this new rehabilitation policy is even available to debtors who have not been approved for Income-Based Repayment Plans (IBRPs). Pretty sweet deal, right?

What the New York Times article did not say is that interest will accrue on the loan balances of most people who make income-based payments because their monthly payments will not be enough to pay off accruing interest or pay down the principal of their loans. So for most people who choose the income-based option for rehabilitating their loans, the amount of money they owe will grow larger.

And, as the Times pointed out, people who make income-based payments who have not been placed in federally approved income-based repayment plans won't have the benefit of having their payments applied to the 20- or 25-year IBRP repayment plan terms.  In other words, people who make income-based payments who are not in IBRPs will fall into a kind of financial purgatory where they won't be considered defaulters but their loan balances will grow larger with each passing month.

I think it is interesting that the Times reporter who wrote about the new student-loan rehabilitation policy did not point out the pitfalls of the policy, probably because she wasn't aware of the policy's implications. Essentially, the federal government is postponing the day on which it will have to admit that millions of people are not making their student-loan payments or are making payments that are so low that their loan balances are actually growing.  Apparently, the Obama administration and Arne Duncan's Department of Education are hoping to skip town before this mess blows up.

But it is going to blow up. As I have said many times, the percentage of people who are actually paying off their loans is a lot lower than the federal government will admit. The true default rate--the percentage of people who will never pay back their loans--is at least double the rate that the government reports every autumn. 

In short, American higher education is much like France in 1940,  just before the Germans invaded. It is living in dream world that supposedly will last forever. But it won't last forever.  Eventually, this house of cards, which was constructed with federal student-aid money and which has been so profitable for the executives of the for-profit colleges, will come crashing down. And American higher education will be altered in ways we can't now imagine.

References

Ann Carrns. For Student Loan Borrowers in Default, Redemption Just Got Easier. New York Times, August 23, 2014, p. B6.