Showing posts with label long-term income-based repayment plans. Show all posts
Showing posts with label long-term income-based repayment plans. Show all posts

Monday, April 3, 2017

Sara Fern v. FedLoan Servicing: A single mother of three discharges her student loans in bankruptcy over the objections of the U.S. Department of Education

Student loans cannot be discharged in bankruptcy, right? WRONG! Distressed student borrowers have won a string of victories in the bankruptcy courts over the past few years. And Fern v. FedLoan Servicing is another case for the win column. 

Fern v. FedLoan Servicing: A single mother of three children discharges her student loans in bankruptcy

In 2016, Sarah Fern, a 35-year-old mother of three children, discharged about $27,000 in student loans in an Iowa bankruptcy court. And last February, her victory was affirmed by the Bankruptcy Appellate Panel of the Eighth Circuit Court of Appeals.

Over the years, Fern had not made a single payment on her student loans. Nevertheless, she had never been in default because her loans had always been in deferment or forbearance due to her economic circumstances.

At the time of her bankruptcy trial, Fern was raising three children on take-home pay of about $1,500 a month, which she supplemented with food stamps and public housing assistance. Fern drove an old car in need of repair, and she could not afford to buy a more reliable vehicle.

Although Fern attempted to improve her income status by taking out student loans to enroll in two postsecondary programs, neither program led to a higher paying job. As the bankruptcy court noted, Fern had never earned more than $25,000 a year.

The Department of Education opposed Fern's effort to shed her student loans in bankruptcy. DOE produced an expert witness who testified that Fern qualified for various income-based repayment plans. According to the expert, Fern's income was so low that her monthly payments would be zero if she entered one of these plans.

But Judge Thad Collins, an Iowa bankruptcy judge, rejected DOE's arguments and discharged Fern's student loans in their entirety. In Judge Collins' view, Fern would probably never be in a financial position to pay back her loans.

Under an income-based repayment plan, Judge Collins noted, Fern's monthly payments would be zero, but her debt would continue to grow as interest accrued on the unpaid balance. Although the government would forgive any unpaid portion of Fern's loans at the end of the repayment period (20 or 25 years in the future), the cancelled loan debt might be taxable to her. In addition, if Fern's student loans were not discharged, they would be a blot on her credit record.

Judge Collins recognizes emotional stress from long-term indebtedness

Judge Collins also considered the emotional distress that comes from long-term indebtedness, Fern's loans had already caused her emotional stress, Collins observed, and she would continue to suffer from emotional stress if she were forced into a long-term repayment plan:

This mounting indebtedness has also indisputably been an emotional burden on [Fern]. [She] testified that knowing that the debt is hanging over her, constantly growing, and that she will never be able to repay this debt, is distressing to her. [Fern] testified that she feels like she will never be able to get ahead because she will always have this debt.
In Judge Collins' opinion, the emotional burden of long-term indebtedness was a hardship that weighed in favor of discharging Fern's student loans, even though this burden could not be quantified. "The Court will not ignore a hardship," Collins wrote, "simply because it is not reflected on a balance sheet."

Department of Education appeals Judge Collins' decision

The Department of Education appealed Judge Collins' decision; and last February. the Bankruptcy Appellate Panel of the Eighth Circuit Court of Appeals affirmed Collins' ruling. According to DOE, Judge Collins erred by taking Fern's emotional burdens into account, by considering the tax consequences of a long-term repayment plan, and by recognizing that Fern's debt would grow over the years because her monthly payments under a long-term plan (zero), would cause interest on her loans to continue accumulating.

But the Eighth Circuit's BAP disagreed. "These additional observations identified by the Bankruptcy Court simply served to supplement its determination of undue hardship under the totality of circumstances test," the BAP court wrote.

The Fern decision is a big win for student-loan debtors. This is the latest federal appellate court decision to reject creditors' arguments that bankrupt student borrowers should be pushed into 20- or 25-year repayment plans instead of getting a fresh start. 

There is justice in the world (sometimes)

As one of Cormac McCarthy's fictional characters said in the novel, The Crossing, "Hay justicia en el mundo!"

Yes, there is justice in the world, but justice is not distributed evenly and sometimes it arrives too late to do us any good. Sara Fern was very fortunate to have obtained justice from Judge Thad Collins, who wrote a remarkably sensible and compassionate decision. And she was even more fortunate to have Judge Collins' decision affirmed on appeal by the Eighth Circuit's Bankruptcy Appellate Panel.


Fern v. FedLoan Servicing, 563 B.R. 1 (8th Cir. BAP 2017).

Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016).

Monday, August 29, 2016

20-year Income-Based Repayment Plans for Student-Loan Debtors: A Return to Feudalism

Paul Craig Roberts wrote a chilling essay a couple of months ago in which he argued that Greece is being looted by its corporate creditors. According to Roberts, the banks don't want Greece to pay off its debts because the banks ultimately intend to strip Greece of its national assets, including its ports and nationally protected islands.

Here is the core of Roberts' argument:
The banks don't want Greece to be able to service its debt, because the banks intend to use Greece's inability to service the debt in order to loot Greece of its assets and resources and in order to roll back the social safety net put in place during the 20th century. Neoliberalism intends to reestablish feudalism . . . . The way Germany sees it, the [International Monetary Fund] is supposed to lend Greece the money with which to repay the private German banks. Then the IMF is to be repaid by forcing Greece to reduce or abolish old age pensions, reduce public services and employment, and use the revenues saved to repay the IMF. As these amounts will be insufficient, additional austerity measures are imposed that require Greece to sell its national assets, such as public water companies and ports and protected Greek islands to foreign investors, principally the banks themselves or their major clients. (emphasis supplied)

In essence, Roberts is predicting that Greece will eventually cease to be a sovereign nation; it will become a feudal serfdom controlled by private investors--principally German banks.

Something similar is occurring in American higher education. Private investors are operating for-profit colleges for the purpose of looting American taxpayers, who provide the federal student loan money that naive students use to pay the colleges' outlandish tuition prices. Almost half the students who take out student loans to attend for-profit colleges default within five years, but the for-profit colleges doesn't care. They got their money upfront.

How does this equate to feudalism? The Obama administration knows that student-loan default rates are shockingly high, but it is covering up this problem by forcing students into long-term income-based repayment plans--plans that require former students to pay a percentage of their income to the government for 20, 25, or even 30 years. In a very real sense, these long-term debtors have become feudal serfs, indebted for almost their entire working lives for the privilege of attending a shitty for-profit college. (Perhaps I should have used a different word than shitty--just can't think of one right now.)

And it's not just the for-profit college owners who benefit from this scam. The public colleges and the not-for-profit private colleges are collecting their share of the loot--jacking up tuition prices, knowing that students will simply borrow more and more money to pay their escalating tuition bills.

In fact, college presidents have become the 21st century equivalents of feudal lords--living in palatial presidential homes, flying around the world in private jets to hob nob with donors, and collecting unseemly salaries, while low-paid adjuncts teach the classes much like the serfs of the middle ages.

So, student-loan debtors, you aren't the only ones being raped by the transnational financial oligarchs. The Greek people are your companions in misery.


Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default ratesWashington, DC: Brookings Institution (2015). Accessible at:

Paul Craig Robert. We Have Entered the Looting Stage of Capitalism. Infowars, May 27, 2016. Accessible at