Showing posts with label private student loans. Show all posts
Showing posts with label private student loans. Show all posts

Wednesday, November 17, 2021

Private Student-Loan Debt at an All-Time High: TICAS Releases Snoozer Report

 According to a recent report by the Institute for College Access and Success (TICAS), the 2020 class of college graduates has amassed $136 billion in private student debt.  When this amount is added to the total student debt from federal student loans--about $1.8 trillion, Americans are on the hook for almost $2 trillion in student debt.

Interestingly, students in the District of Columbia had the highest average private-debt level: $51,738. Eight states in the Northeast were in the top ten for high private student debt. The average private student debt in Delaware for the class of 2020 was over $50,000.

As Cody Hounanian, Executive Director of the Student Debt Crisis Center, aptly noted, the TICAS report shows that the costs of higher education have "skyrocketed and are out of control."

But are colleges doing anything to control their costs? Not much. Higher Education thinks it should be congratulated because tuition costs rose less than the inflation rate--the first time in decades that tuition increases didn't exceed inflation. I suppose that's good news of a sort, but the critical fact is that tuition costs go up every year.

TICAS's report concluded with a list of policy recommendations, but they're nothing to write home about.

TICAS recommends more federal grant money for low-income students, more oversight of the private student-loan industry, more loan counselors, and better advertising of income-based repayment plans.

Ho, hum!

TICAS did not recommend bankruptcy relief for student-loan debtors who are overwhelmed by the college debt. It said nothing about cracking down on the private-college industry, other than a vague recommendation to "Tighten Institutional Accountability."

I've been writing about the student-loan crisis for 25 years, and I've read dozens of reports and policy papers by think tanks and policy centers.  

Most of them recommend more money, more transparency, and more lenient income-based repayment programs.  TICAS's recommendations added nothing new.


Another snoozer report on the student-loan crisis!






Friday, August 27, 2021

Never co-sign a student loan. I repeat: Never co-sign a student loan.

 Joss recently wrote Stever Rhode (the Get Out of Debt Guy) and asked for advice about a student loan her father took out to help finance her college education. Joss co-signed the loan but understood that her father would pay the loan back. He didn't.

Josh didn't know her father was not paying down the loan until it showed up on her credit report. Unfortunately, although Josh's dad bailed on his commitment, Joss is responsible for paying back the loan.

Remember that venerable old saying: Never lend money to a friend because you will lose them both.  

This same advice applies to co-signing student loans. Just don't do it, because it is an excellent way to break up a family.

Banks that issue private student loans almost always require the student to find a co-signer--and that co-signer is usually Mom, Dad, Gramps, or Grandma.

It may seem like a good idea at the time--one for all and all for one. But if the student doesn't pay back the loan, the bank is coming after Mama, Pop, Granny, or Old Granddad.

Conversely, as in Joss's case, if Pop takes out a student loan to help pay Junior's way through college and Junor co-signs the loan, Junior will be personally on the hook if Pop skips town.

How do people find themselves in the situation of being asked to co-sign a student loan? I think, in most cases, the student maxes out on federal student loans and needs more money to continue going to college.  

The student takes out a private student loan and gets Mom or Dad to cosign. Or Mom and Dad take out a private loan, and junior cosigns. 

This is never a good idea. In fact, if Junior needs to take out private loans to attend college, Junior should go to Plan B.   Junior should either drop out of school, go to work, and save enough money to return, or Junior should transfer to a cheaper college.

If there is an exception to this advice, it does not now occur to me.

Hell, no! I'm not co-signing your student loans.




Saturday, June 19, 2021

Student-loan payment relief during COVID crisis ends soon: Will student debtors start making payments again?

 About 40 million student borrowers got some relief last year when the Department of Education allowed student debtors to temporarily skip their loan payments due to the COVID crisis.

Even better, DOE did not charge interest on student loans during the forbearance period. 

But DOE's relief program ends on September 30, and the feds expect all borrowers to resume their loan payments in October. Will borrowers begin writing those monthly checks?

Maybe not. Navient reported in April of last year that 40 percent of federal student-loan borrowers requesting COVID repayment relief held loans that previously had been delinquent or in forbearance.  In other words, millions of student debtors were not making payments on their loans even before the COVID crisis.

Student loans are kind of like overdue library books. They are easy to forget about.

The Department of Education's website lists a host of options for borrowers as the COVID-forbearance plan winds down. If you are a distressed student debtor, you should take a look at that site.

But here's my advice. If you are financially unable to repay your student loans under DOE's standard 10-year repayment program, sign up for the most generous income-based repayment plan  (IBRP) you can find. IBRPs are a terrible option because your loan payments will not be large enough to cover accruing interest. Thus, your loan balance will keep growing in the years to come, even if you make regular monthly payments.  

But your monthly loan payments will be lower under an IBRP and allow you to tread water until some sort of comprehensive relief program is put in place.

As I have said a thousand times, Congress needs to revise the Bankruptcy Code to allow overburdened college borrowers to discharge their student loans in a bankruptcy court. But that may never happen.

Some politicians are calling for wholesale student-loan relief. Just wipe out $1.7 trillion in student debt, they say. But that may never happen either. 

The student-loan catastrophe is enormous and getting bigger with each passing day. If you haven't taken out federal student loans yet, choose a college program that will lead to a job and do everything you can to avoid taking on onerous levels of student debt.  

If you already have a mountain of student-loan debt, get into an IBRP and wait for Congress to clean up the mess. But don't hold your breath.

And one more piece of advice. Don't ask your parents to take out a Parent PLUS loan, and don't take out loans from a private lender.  











Wednesday, December 9, 2020

Three professors propose a complicated plan to protect private student-loan debtors: But isn't there a simple solution?

 Leaves of Grass,  director Tim Blake Nelson's cinematic paean to Oklahoma culture, tells a story about  Bill and Brady Kincaid, twin brothers who grew up in Little Dixie (southeastern Oklahoma). Edward Norton brilliantly plays both parts. 

Bill Kincaid escapes his redneck upbringing, improves his diction, and becomes a philosophy professor at Brown University. Brady, his twin brother, remains in Oklahoma, where he retains his Oklahoma accent and grows hydroponic marijuana.

When Professor Bill reluctantly returns to his roots, Brady, the stay-at-home brother, tells Bill that he reads all of Bill's scholarly publications.  Brady observes that Bill and his colleagues never write about a topic; instead, they write about what other scholars have written.  Professor Bill admits this is true.

"Well," Brady says with a perfect Oklahoma twang, "Why don't I write a book for all y'all, and I'll title it What's the F-cking Point?

I thought about this line from Leaves of Grass after perusing a scholarly article written by Professors Prentis Cox, Judith Fox, and Stacey Tutt.  The three wrote about a serious public policy problem: private student-loan borrowers' lack of consumer protection from fraud and abuse.

Cox, Fox, and Tutt are right.  Students have taken out about $150 billion in private student loans, and these loans do not have the consumer protections afforded to federal-loan borrowers.

 Besides, most private lenders require students to get a co-signer on their loans---usually mom or dad. Students and their parents who run into financial trouble can't discharge these loans in bankruptcy unless they can show "undue hardship"--a standard that is almost impossible to meet.

These scholars examined this problem in great detail; their law review article is 59 pages long, comprises 27,000 words, and is buttressed by 323 footnotes.  What do they recommend?

The authors propose the passage of two model statutes by all 50 state legislatures that would correct the evils they identified.  The first statute is titled the Private Student Borrowers Protection Act, and the second law is labeled the Private Student Loan Mediation Act.

I have a couple of questions about the Cox, Fox, and Tutt proposal:

First, what are the chances that even one state legislature will pass either of these laws? I would say zero.

Second, how many people will even read the professors' turgid, footnote-studded article?  And by reading, I don't mean skimming over the introduction and conclusion as I did.  How many people will read the whole damn thing--all 59 pages, all 27,000 words, all 323 footnotes?  I would say about two dozen.

I don't mean to denigrate academic endeavors. Some scholarly topics are complicated; I understand that. But--let's not overthink things. 

Private student loans are onerous and predatory for two reasons: 1) the banks require co-signers for these loans, and 2) the student borrower and the co-signer are virtually barred from bankruptcy relief--even if they are insolvent.

I have a proposal for addressing these problems, and it is only nine words long: Delete the "undue hardship" language from the Bankruptcy Code.

Virtually everyone agrees that the federal student loan program and the private student-loan industry have created a shit show for people who just want to get a college degree.  Federal and private student loans have saddled millions of Americans with massive student-loan debt they can't repay. Politicians, professors, and public-policy wonks all have solutions, but most of these solutions protect the status quo. 

Everyone wants to fix the student-loan program, but most reformers don't want to stem the flow of federal and private-loan money into college coffers. Like drug addicts, the universities must get their regular infusions of borrowed cash--even if they ruin their students' lives.

But if Congress would just strike the undue hardship language from the Bankruptcy Code, then student loans would be treated like any other consumer debt.  That single change would allow distressed student debtors to get relief from onerous loans in the bankruptcy courts.  

But nobody wants to do the obvious and straightforward thing. Most reformers just want to add elaborate, bureaucratic trappings to a con game that keeps the student-loan scam alive for a few more years.  

But isn't it time for Americans to ask the question Brady Kincaid asked his philosopher brother: "What's the f-cking point?

Redneck Brady, to his twin brother, Professor Bill: "What's the f-cking point?"

References

Prentiss Cox, Judith Fox, & Stacy Tutt. Forgotten Borrowers: Protecting Private Student Loan Borrowers Through State Law.  11 University of California-Irvine Law Review 43 (2020).

Wednesday, June 24, 2020

Consumer Financial Protection Bureau v. National Collegiate Student Loan Trusts: A Window into the World of Private Student Loans

CFPB v. NCSLT: A Settlement is Scuttled

In 2017, the Consumer Financial Protection Bureau (CFPB) sued the National College Student Loan Trusts (NCSLT) and their debt collector, Transworld Systems, accusing the two defendants of illegal student-loan debt collection. Specifically, the CFPB accused NCSLT and Transworld of collecting on private student loans after the statute of limitations had expired and of suing debtors for unpaid student loans even though NCSLT could not prove it owned the debt.

CFPB and NCSLT  quickly entered into a settlement agreement subject to a federal court's approval. These are the essential terms of the settlement:



  • National Collegiate and Transworld must conduct an independent audit of all 800,000 student loans in its various trusts.

  • National Collegiate will stop trying to collect on student loans if it cannot prove it owns the debt.

  • NCSLT will stop filing lawsuits on student loan debt after the statute of limitations has expired.

  • NCSLT and its debt collecting agency will stop reporting negative credit information on borrowers that NCSLT improperly sued.

  • NCST will stop filing false or improperly notarized legal documents.

  • NCST will pay substantial monetary penalties.

Unfortunately for the litigants, Federal Judge Maryellen Noreika refused to approve the settlement because the parties involved did not have the authority to settle the lawsuit.

If this glitch gets worked out and the deal is finally approved, it could lead to $5 billion in debt relief for people who defaulted on private student loans. In the meantime, the lawsuit provides a window into the world of private student loans.

The Securitization of Private Student Loans

Most students finance their college education through government loans, and the total amount of outstanding federal student-loan debt is now $1.74 trillion. The private student-loan market is much smaller. According to Nerdwallet, college borrowers only owe about $125 billion in private student-loan debt.

Private banks and financial institutions (Sallie Mae, SoFi, Wells Fargo, etc.) issue student loans, but private lenders generally do not hold the loans on their books for very long. Instead, the loans are securitized. In other words, the loans are packaged and sold to investors as securities called student-loan asset-backed securities (SLABS). 

SLABS is attractive to institutional investors because they produce a reasonable return rate and are considered low risk. Historically, default rates have been lower for private student loans than federal loans because the banks usually require the student borrower to find a guarantor to co-sign a private student loan—often a parent or grandparent. Thus, if a student borrower defaults on a private loan, the lender can sue Mom or Granny. 

Also, student loans are difficult to discharge in bankruptcy because the same "undue hardship" standard that applies to federal loans also applies to private student loans.

Nevertheless, defaults on private student loans have shot up recently. National Collegiate Student Loan Trusts owns 800,000 private student loans. According to Bloomberg,  more than half of the principal on those loans was in default at the time of the proposed settlement between CFPB and NCSLT in 2017.

All these private student loans are managed by loan servicing companies, and when borrowers default, collection companies usually file suit on the creditors' behalf in a state court. In recent years, there have been thousands of lawsuits filed against private student-loan defaulters all over the United States. Transworld Systems alone has filed 38,000 debt-collection lawsuits.

Unfortunately for the creditors (the owners of the SLABS), statutes of limitation apply to collection efforts on private debt. Unless the creditor sues before the statutory limitation period expires, it cannot legally recover on student loans in default.

Moreover, the SLABS owners must prove they own the debt. In some cases, creditors have gone to court and found themselves unable to produce the paperwork that shows they are the legal owners of the debt they are trying to collect. 

Why is CFPB v NCSLT important?

If you've seen the movie The Big Short, you know that the financial crisis of 2008 was triggered by a wave of defaults on home mortgages. Financial institutions had bundled thousands of home loans into securities call ABS (asset-backed securities), which were represented as being low-risk investments.  

In fact, many of the underlying mortgages were subprime loans on homes that had been overvalued. When the housing market collapsed in 2008, millions of homeowners defaulted on their mortgages, and the ABS investors lost tons of money. 

Also, when creditors sued the defaulting homeowners, they often could not prove they owned the debt. A lot of the paperwork on these mortgages had been "robo-signed" and improperly notarized. In many instances, the courts refused to hold defaulting homeowners liable on their home loans.

Something like that is happening now in the private student-loan market. People who have private student loans are defaulting at a surprisingly high rate. Creditors are filing suit against defaulters but often cannot show they own the debt. In some instances, paperwork has been improperly"robo-signed," causing some judges to rule in favor of debtors. 

Financial commentators have warned for years that the student-loan program is in a bubble, much like the housing bubble of 2008, and that a major financial crisis in the student-loan industry is on the horizon. The coronavirus has put millions of Americans out of work, leaving them unable to make monthly payments on their federal and private student loans. In other words, the bubble may be about to burst.  

What this means is hard to say. In the private student-loan market, investors in SLABS will undoubtedly lose money, but the federal government holds more than 90 percent of all student loans. The Department of Education can maintain the status quo in the short term by merely continuing to issue student loans as it has for the past 50 years. But even Education Secretary Betsy DeVos admitted publicly in 2018 that only a minority of student borrowers are current on their loans.

Presumptive Democratic Presidential nominee Joe Biden has proposed forgiving all federal student debt acquired to attend public colleges. But a more straightforward way to deal with this massive debt crisis is to allow insolvent student-loan debtors to discharge their debt in the bankruptcy courts.


Education Secretary Betsy DeVos: What, Me Worry?



Sunday, May 24, 2020

HEROES bill dishes out thin gruel for student-loan debtors: "Please, sir, I want some more."

In its original form, the HEROES bill was 1,800 pages long; and I am grateful to Steve Rhode of Get Out of Debt Guy for summarizing its essential elements.  The original legislation provided up to $10,000 in student-loan relief for borrowers holding federal or private loans.

By the time the House of Representatives approved the HEROES Act in mid-May, relief for student debtors was watered down considerably. As Mark Kantrowitz reported, the bill that was approved by the House limits relief to "economically distressed borrowers."

Who are the economically distressed borrowers? Mostly these benefits will go to people who are:

  • in default on their loans or whose monthly payments are more than 90 days overdue,
  • People with economic hardship deferments, cancer treatment deferments, or unemployment deferments,
  • People whose loans are in forbearance and whose debt burden exceeds 20 percent of the borrower's income.

The HEROES Act was thin gruel when it was first introduced, but the gruel got even thinner by the time the House of Representatives passed it by a vote of 208 to 199.

Forty-five million Americans are burdened with federal student loans totaling $1.6 trillion, and private-loan borrowers owe about 125 billion. That's a lot of debt, and the HEROES Act offers only a few crumbs of relief.

Assuming the Senate approves the HEROES Act in its present form (which is not likely), most of this money will do nothing more than pay down the interest on borrowers' student-loan balances. People in income-driven repayment plans are seeing their debt grow larger with each passing month due to accruing interest. People whose student loans are in deferment or forbearance are not making their monthly loan payments, but interest is accruing on their loan balances as well.

In short, the HEROES Act is an insult to the millions of people who are being dragged down by unmanageable student loans. Like Oliver Twist, all 45 million student-loan borrowers should shout, "Please, sir, I want some more."


Please, sir, I want some more.

Friday, March 6, 2020

Retirees with student-loan debt should ask elderly presidential candidates what they plan to do about the student-loan crisis

Last month, the New York Times ran a story about retirement-age Americans who are struggling to pay off student-loan debt. As reported by Times writer Tammy La Gorce, 2.8 million Americans in their 60s have student-loan obligations, a number that has quadrupled since 2005.

The average debt load for elderly student-loan debtors has nearly doubled between 2012 and 2017--from $12,100 to $23,500. And, according to the Times story, most student-loan debt held by older Americans was taken out to pay for for their children's education.

Many of these elderly student-loan debtors jeopardized their own retirement by borrowing money to get their kids through college. And these debts are virtually impossible to discharge in bankruptcy.

It is now inevitable that the United States will elect an old guy for President in November: Donald Trump, age 73; Joe Biden, age 77; or Bernie Sanders, who is 78.  Will they be sympathetic to senior Americans who are burdened by student debt?

Why don't we inquire? If we get an opportunity to question Bernie, Biden, or Trump, these are the questions we should ask.

First, do you support the bill that Congressman John Katko introduced in Congress to eliminate the "undue hardship" provision in the Bankruptcy Code so that insolvent Americans can discharge student debt in bankruptcy just like any other unsecured consumer debt? Yes or no.

Second, do you support the repeal of the so-called "Bankruptcy Reform Act" that made it more difficult and more expensive for financially distressed Americans to get bankruptcy relief? Yes or no?

Third,  do you support legislation that would prohibit the federal government from garnishing the Social Security checks of retired Americans who defaulted on their student loans? Again, yes or no?

And here are some candidate-specific questions to ask:

President Trump, you indicated that the Department of Education is looking at some options for relieving the suffering of college borrowers who are burdened by student-loan debt? Precisely what do you have in mind?

Senator Sanders, do you have any plan for addressing the student-loan crisis other than forgiving $1.6 trillion in student debt?  If you are elected President, and Congress refuses to approve your loan-forgiveness promise, do you have any other ideas about relieving the student-debt crisis?

Former VP Joe Biden, do you regret your role in passing the notorious Bankruptcy Reform Act of 2005? Would you work to repeal the law if you are elected President?  Would you at least repeal the provision that makes private student loans almost impossible to discharge in bankruptcy?

Curiously, although the student-loan program is totally out of control and burdens 45 million Americans, the media has not pressed any of the presidential candidates about the student-loan crisis.

College and university leaders have said almost nothing about this catastrophe, and they won't be asking the presidential candidates any awkward questions about the federal student-loan program. Harvard, for example, took in $4 billion in federal money between 2011 and 2015. The student-loan program works just fine for America's wealthiest university.

But ordinary Americans need to know what Bernie, Biden, and Trump plan to do if they are elected President. Ask those questions yourself because the press and the universities aren't interested.


Harvard University President Lawrence Bacow: Student-loan crisis? What student-loan crisis?


Monday, November 4, 2019

Crocker v. Navient Solutions: A small win for student-loan debtors

Crocker v. Navient Solutions, a recent Fifth Circuit decision, is a small win for student-loan debtors. Essentially, the Fifth Circuit ruled that a private student loan obtained to pay for a bar review  course is dischargeable in bankruptcy. (The opinion also includes an extensive analysis on a jurisdictional issue, which will not be discussed here.)

Brian Crocker took out a $15,000 loan from Sallie Mae to pay for his bar-examination prep course. Subsequently, Crocker filed for bankruptcy and his  Sallie Mae loan was discharged.

Navient Solutions, which assumed the legal right to collect on Crocker's debt, continued trying to collect on the $15,000 loan after Crocker's bankruptcy discharge, claiming the debt was not dischargeable in bankruptcy. In August 2016, Crocker filed an adversary proceeding against Navient in the same bankruptcy court where he had obtained his bankruptcy discharge. Crocker sought a declaratory judgment that his Sallie Mae loan had been discharged and a judgment against Navient, holding it in contempt for continuing its collection efforts after Crocker's bankruptcy discharge.

A Texas bankruptcy court ruled in Crocker's favor, and Navient appealed.  The Fifth Circuit identified three types of student debt that are not dischargeable in bankruptcy without a showing of undue hardship:

  • Student loans made, insured, or guaranteed by a governmental unit (11 U.S.C. § 523(a) (8) (i)), including federal student loans.
  • Private student loans to attend a qualified institution (11. U.S.C. § 523 (a) (8) (B)). 
  • Debt arising from "an obligation to repay funds received as an educational benefit, scholarship, or stipend" (11 U.S.C. § 523 (a) (8) (ii)).

Sallie Mae's loan to Crocker was not a governmental loan, so § 523 (a) (8) (i) did not apply. Navient conceded that the loan was not made to a qualify institution, and thus § 523 (a) (8) (B) did not apply.

Instead, Navient argued that the loan was nondischargeable under § 523(a) (ii). Navient maintained that the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act made all private student loans nondischargeable, including Sallie Mae's $15,000 loan to Crocker to pay for his bar-exam prep course.

The Fifth Circuit disagreed. The court pointed out that the statutory provision Navient relied on did not mention loans at all. Instead that provision "applies only to educational payments that are not initially loans but whose terms will create a reimbursement obligation upon the failure of conditions  of the payments."

Therefore, the court ruled, "The loans at issue here, though obtained in order to pay expenses of education, do not qualify as 'an obligation to repay funds received as an educational benefit, scholarship, or stipend' because their repayment was unconditional. They therefor are dischargeable."

As Steve Sather, a Texas bankruptcy lawyer, observed in a recent blog essay, the Crocker decision is only a small victory for student-loan debtors. It is nevertheless a significant decision because it is a reminder that not all private student loans are covered by the Bankruptcy Code's "undue hardship" provision.  Private loans taken out by law school graduates to pay for bar-examination preparation courses can be discharged in bankruptcy.

References

Crocker v. Navient Solutions, __ F.3d __, 2019 WL 5304619 (5th Cir. Oct. 22. 2019).

Steve Sather. Fifth Circuit Grants Small Victories to Student Loan Debtors, A Texas Bankruptcy Lawyer's Blog, October 26 2019, http://stevesathersbankruptcynews.blogspot.com/2019/10/fifth-circuit-grants-small-victories-to.html.





Thursday, June 6, 2019

Student Borrowers Beware: Joe Biden is a Lackey of the Banks

Fourteen years ago, Congress passed a so-called bankruptcy reform law at the behest of the banking industry. One provision--inserted solely for the benefit of the banks—made private student loans non-dischargeable in bankruptcy unless the debtor could show “undue hardship.” The banks justified this heartless legislation as a way to reduce interest rates on private student loans. They argued that the additional protection for creditors would make it possible for banks to loan students money at a lower interest rate because defaulting borrowers would find it virtually impossible to discharge their private college loans in the bankruptcy courts.

This legislation benefited Sallie Mae, Wells Fargo and other major players in the private student-loan market, but the U.S. Department of Education issued a report in 2015 arguing that this provision should be repealed.

This is what the DOE report had to say:
There has been no evidence that the 2005 changes to bankruptcy caused interest on student loans to decline or access to credit to increase significantly. As private student loans generally do not include the consumer protections, such as income-driven repayment plans, included in federal loans, the undue-hardship standard for bankruptcy discharge leaves private student loan borrowers in financial distress with few options.
According to an article in International Business Times (IBT), Senator Joe Biden was an enthusiastic supporter of this Fat Cat Assistance Act, which made it harder for insolvent student-loan debtors to obtain bankruptcy relief. As IBT’s David Sirota observed:
Though the vice president has long portrayed himself as a champion of the struggling middle class--a man who famously commutes on Amtrack and mixes enthusiastically with blue-collar workers—the Delaware lawmaker has played a consistent and pivotal role in the financial industry’s four-decade campaign to make it harder for students to shield themselves and their families from creditors, according to an IBT review of bankruptcy legislation going back to the 1970s.
Indeed, Ed Boltz, who was president of the National Association of Consumer Bankruptcy Attorneys in 2015, observed that “Joe Biden bears a large amount of responsibility for passage of the bankruptcy bill.” In fact, the New York Times reported that Biden voted for the bill four times: in 1998, 2000, 2001, and in March 2005, when the bill finally passed the Senate by a vote of 74 to 25.

And—surprise, surprise!—as of 2015, the financial industry had donated $1.9 million to Biden over the course of his career. Now Joe is launching another campaign for the presidency.

So if you get an opportunity to vote for Joe Biden, keep this mind: he is a lackey of the banks. And if you are a student-loan debtor who supports Mr. Biden's presidential bid, then you are an idiot.

References

Christopher Drew & Mike McIntire. Obama Aides Defend Bank’s Pay to Biden Son. New York Times, August 24, 2008.

David Sirota. Joe Biden Backed Bills to Make It Harder for Americans to Reduce Their Student Debt. International Business Times, September 15, 2015.

U.S. Department of Education. Strengthening the Student Loan System to Better Protect All Borrowers. Washington D.C., October 1, 2015. [Note: This DOE report has been removed from the web.]

Wednesday, May 22, 2019

How Can I Get Out of the Student Loan I Cosigned for My Son? Advice from Steve Rhode, the Get Out of Debt Guy

If you are thinking about taking out a Parent PLUS loan to finance your child's college education or co-signing a relative's loan, you should read Steve Rhode's essay, first published at Get Out of Debt Guy, a consumer counseling web site.

Question:
Dear Steve,
It took my son 6 years to get a BA degree. By the 5th year, I ran out of money so I co-signed a private loan for him. For the past 4-5 years, I pay on this loan diligently every month because he refuses to the pay the loan or give me anything towards the payment and I don’t want to jeopardize my credit.
The original loan amt was 34K it is now only down to 29K because the interest rate keeps going up ..now it is at 7.75%. Additionally, he refuses to re-finance the loan
How can I get out from under the responsibility of his debt without jeopardizing my credit?
Sue
Answer:
Dear Sue,
Your son is being kind of a jerk. You helped him finish school and he can at least make some payment, even if he can’t pay it all each month.
Unfortunately, when you cosigned the loan you agreed to be 100% responsible for the loan. There is nothing good in cosigning if you are the one signing. My universal law of cosigning is don’t do it.
If you don’t want to ding your credit then you either need to pay the loan off in full or keep making at least the minimum monthly payment.
If you wanted to remove your liability for the debt you can do that but it will have a credit impact. Some of those options include filing bankruptcy or paying less than you owe on the balance as a settlement. However, you will need to go delinquent to settle it and the balance forgiven may be reported as a bad debt and be taxable.
The only way to make this situation different without harming your credit or costing you a big chunk of change would be to go back in time to the minute before you cosigned for him.

*******
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. 

Thursday, April 11, 2019

Rep. Maxine Waters didn't ask mega-bank executives a stupid question at a congressional hearing; She asked them the wrong question

Congresswoman Maxine Waters, Chair of the House Financial Services Committee, asked seven big-bank executives an ignorant question when she had them appear before her committee earlier this week.

“What are you guys doing to help us with this student loan debt?" Waters asked the bankers.  Three of them  separately informed Waters that their banks have been out of the federal student-loan business since 2010, when the federal government began dispersing student loans directly. 

Ms. Waters apparently didn't know that, which must have been embarrassing to her. Nevertheless, Waters did not ask a stupid question. She asked the wrong question. In fact, several banks are involved in the private student-loan market: Wells Fargo, Citizens Bank, Suntrust, and Sallie Mae--to name a few. 

And it is a dirty business. Several banks are bundling their private student loans and selling them to investors as student-loan backed securities called SLABS, very much like the mortgage-backed securities that went south during the 2008 home-mortgage crisis. 

Moreover, most banks require student borrowers to find co-signers for their private student loans, which usually means Mom and Dad.  If a student defaults on a private student loans, the co-signer is on the hook to pay back the debt.  Can a co-signer discharge a child's student loan in bankruptcy? Probably not.  When Congress passed the so-called Bankruptcy Reform Act in 2005, it inserted a clause in the Bankruptcy Code making private student loans nondischargeable in the absence of "undue hardship."

So this is the question Congresswoman Maxine Waters should have asked the bankers who were arrayed before her at the Financial Services Committee hearing yesterday. "Do you support a change in the Bankruptcy Code that would make student loans dischargeable in bankruptcy like any other consumer debt?"

Put another way, she might have asked the bankers if they support Representative John Katko's bill to remove the "undue hardship" language from the Bankruptcy Code, which would allow destitute debtors to shed burdensome student-loan debts in the bankruptcy courts. How would the bankers have answered if Maxine Waters had asked them the right question? 

And here are a two questions for Congressman Waters:

Do you support Congressman Katko bill, which calls for taking the "undue hardship" language out of the Bankruptcy Code? 

Will you agree to be a co-sponsor of Representative Katko's bill, even though Mr. Katko is a Republican?

Megabank CEOs: "We don't know nothin' bout no student loan program."





Tuesday, August 28, 2018

Bob Hertz, Editor of New Laws for America, Has Some Good Suggestions for Solving the Student Loan Crisis

Bob Hertz, who manages a website titled New Laws for America (newlawsforamerica.blogspot/) sent me his list of legal reforms to solve the student loan crisis.

I don't agree with all of Mr. Hertz's proposal, but all are worthy of consideration. I am listing some of his suggestions:

1) Student borrowers should not be required to make payments on their student loans until they make at least $40,000.

2) No interest should accrue on student loans. In fact, interest on student loans should be abolished altogether.

3) All student debt owed by borrowers or cosigners over age 60 should be forgiven.

4) Students debtors should have access to the bankruptcy courts.

5) The following types of academic programs should be excluded from the student-loan program:


  • Third-tier law schools
  • MBA programs
  • Graduate programs in liberal arts
  • for-profit vocational schools
  • loans for living expenses

Near the conclusion of Mr. Hertz's list of recommendation, he makes this trenchant observation, which I quote:
Let's quit harassing and destroying our own citizens. The Federal Reserve was rich enough to buy up billions of 'toxic assets' after the bank meltdown of 2008. We can do the same with toxic student loans, which are destructive to more individuals than subprime mortgages. You an walk away from an unaffordable house. That destroys your credit but your financial life can be rebuilt.  These student loans are forever. 
I will take this opportunity to list my own list of student-loan reforms, which are similar to Mr. Hertz's reforms, but not identical.

1. Distressed student borrowers should be able to discharge their student loans in bankruptcy like any other nonsecured consumer debt.

2) The for-profit college industry should be shut down completely.

3) The Department of Education should be forbidden from garnishing Social Security checks from elderly student-loan defaulters.

4) The Parent PLUS program, which loans money to parents of college students, should be abolished; and private lenders should be prohibited by law from requiring student debtors to obtain co-signers for their loans. In addition, all student-loan cosigners should be immediately released from any legal obligation to pay back student loans that were taken out to benefit a third party (usually the child or grandchild of the cosigner).

I have called for reforms again and again, but I take this opportunity to state them again along with the reforms proposed by Bob Hertz.




Tuesday, July 17, 2018

Mock v. National Collegiate Student Loan Trust: A peek into the shady world of the private student-loan market

In 2007, Casondra Mock, a Texas resident, borrowed about $20,000 from Union Federal Savings Bank, a Rhode Island institution, to finance her studies at the University of Houston at Clear Lake.  The interest rate was high--almost 14 percent.

Under the terms of the loan, Mock would begin paying  $339 a month beginning in December 2009 and would continue making monthly payments for 20 years.  Had she completed all the payments, she would have paid $81,000--4 times what she borrowed.

The Rhode Island bank packaged Mock's loan into a pool of loans, and sold the pool to National Collegiate Funding, which then sold the pool to a "purchaser trust."  Private student loans that are pooled and sold in this way are sometimes called SLABS--Student Loan Asset Backed Securities.

SLABS are very similar to the home mortgages that were pooled and sold to investors ten years ago. Those pooled mortgages were called ABS--Asset Backed Securities. If you watched the movie The Big Short, you know these ABS were sold to investors as AAA rated securities but in fact contained a lot of nonperforming home loans and were actually junk.  When the homes securing these mortgages began going into foreclosure, the ABS became almost worthless, and the real estate market collapsed.

Mock defaulted on her loan and National Collegiate Student Loan Trust (NCSL) sued her along with Kary Mock, who cosigned the loan. NCSL claimed the Mocks owed $37,086,54, together with accrued interest of $5,645.37 for a total debt of $42,731,91.

The Mocks fought the suit in court, acting as their own lawyers. They argued that the interest rate was usurious, the loan was predatory, and NCSL had not provided proper documentation to support its claim.

The trial court ruled for NCSL, entering a judgment of $37,086.54; and the Mocks appealed.

Justice Harvey Brown, writing for the Texas Court of Appeals (First Circuit) rejected the Mocks' usury argument and their argument that the loan was predatory on its face. But Judge Brown reduced the amount of the judgment to $24,408.72 on evidentiary grounds, ruling that NCSL had not produced documentary evidence to support a larger amount.

Why is this Texas court opinion significant? Three reasons:

1) The case shines a light on the shady private student-loan industry. As we see from the Mock case, banks and financial institutions are marketing private student loans all across the United States, charging high interest rates--far higher than students pay on their federal loans. These loans are then bundled into pools (sometimes called (SLABS) and sold to investors.

2) Private student loans are as difficult to discharge in bankruptcy as federal student loans, which makes them especially attractive to investors.  A lot of fat cats are happy to buy SLABS packed with student loans bearing high interest rates, secure in the knowledge that these loans are almost impossible to discharge in the bankruptcy courts.

3) People taking out private student loans are making bad decisions. We don't know Casondra Mock's circumstances, but surely she made a bad decision when she took out a 20-year loan at 14 percent interest to finance her studies at the University of Houston at Clear Lake. She could have taken out a federal student loan with an interest rate half the rate charged by that Rhode Island bank.

Perhaps Casondra had already maxed out her federal student loans and needed more money to pursue her studies. But even if that were the case, surely there was a better way to address her financial needs than taking out a 20-year loan at 14 percent interest.

Acting at the behest of the big banks, Congress put private student loans under the "undue hardship" standard in the 2005 Bankruptcy Reform Act. Some reform!  Congress should repeal the "undue hardship" provision for both federal and private student loans as numerous policy experts have urged. And I'm sure Congress will correct its mistake someday--someday when pigs fly and the lions lie down with the lambs.

Someday, Congress will repeal the "undue hardship" clause in the Bankruptcy Code.


References

Mock v. National Collegiate Student Loan Trust, No. 01-17-00216-CV (Tex. Ct. App. July 10, 2018).

Friday, July 13, 2018

Michelle Singletary gives good financial advice to young people about student loans, and here are my two cents (think La Brea tar pits)

Michelle Singletary, a syndicated columnist for the Washington Post, gives good advice  to young people about managing debt--including student loans. She published a very good article awhile back that contained two good pieces of advice. I will summarize her suggestions and add my own two cents.

First, Singletary challenges the conventional wisdom that young people should begin saving for retirement as early as possible--while still in their 20s.  "Millennials' money is often too tight," she counseled, "and for the many who have student loans, they may be best served spending the first years aggressively paying off this debt."

I agree completely. It makes no sense for young people to put money in IRAs or other retirement accounts if they aren't managing their student loans. After all, if they accumulate student-loan debt that becomes so large they can't make their monthly payments, they'll wind up in 25-year income-based repayment plans, which may prevent them from ever retiring.  It is absolutely critical for millennials to get their student loans paid off as quickly as possible.  For young people, there will be plenty of time later to save for retirement after they pay off their student loans.

Singletary also signaled her disagreement with commentators who lament the high percentage of young adults who live with their parents. It is true that more people in their 20s are living with Mom and Pop; 28 percent, according to Singletary, up from just 19 percent in 2016.

But that may not be a bad thing. If a young person can economize by living with parents, why not do so? That leaves more money to save for a down payment on a house or for paying student loans off early.

Now here are my two cents.

When taking out college loans, students should keep in mind the possibility that they won't find a good job after graduating. If their student loan debt is modest, they can probably make their monthly payments even if they are in a low paying job. But if they borrowed a lot of money and can't make the initial monthly payments, they will be forced to apply for an economic hardship deferment, which are very easy to get.

Those deferments excuse borrowers from making monthly loan payments, but compound interest accrues on the principal. Borrowers who put student loans in deferment for three years will find their loan balances will have grown substantially.

Then--if they can't make regular payments on the larger balance, student borrowers will be pushed into 20- or 25-year income-based repayment plans. In my view, that is a disastrous outcome for young people who took out student loans to improve the quality of their lives, not fall into a lifetime of indebtedness.

And here is some more of my two cents. Never take out private student loans from Wells Fargo, Sallie Mae or any of the other blood suckers who offer private student loans. Those loans are just as hard to discharge in bankruptcy as federal student loans.  And when I say never take out private student loans, I mean never.

Finally, to reiterate advice I have given tirelessly for many years, don't ask your parents to take out a Parent PLUS loan to finance your college studies; and don't ask them to co-sign any of your student loans. If you love Mama and Daddy, don't suck them into a veritable La Brea tar pit of perpetual student-loan indebtedness, especially if you are already in the tar pit yourself.

La Brea Tar Pits


References

Michelle Singletary. Millennials get plenty of financial advice-but most of it is wrong. Herald-Tribune, May 22, 2018.






Wednesday, March 7, 2018

Alexander Holmes v. National Collegiate Student Loan Trust: Don't co-sign your children's student loans!

In 2006, Alexander Holmes co-signed a student loan with Charter Bank One to fund his son's education at the University of Southern Indiana. Charter Bank sold Holmes' loan in a pool of loans to National Collegiate Funding, which then sold the loan to National Collegiate Student Loan Trust (NCSLT).

Ten years later, NCSLT sued Mr. Holmes, claiming he owed more than $16,000 on the loan plus accrued interest. Holmes denied NCSLT's claim and argued that NCSLT did not have standing to sue him.


NCSLT moved for summary judgment, which an Indiana trial court granted. The court then ordered Holmes to pay NCSLT $18,183.26 plus interest and costs.


But Mr. Holmes had a good lawyer and he appealed. An Indiana appellate court reversed the lower court's order against Mr. Holmes on the grounds that NCSLT had not provided admissible evidence that it had the right to collect on the debt Holmes owed Charter Bank.


The court's reasoning is a bit technical; but this is a summary of the appellate court's decision:
In support of its motion for summary judgment against Mr. Holmes, NCSLT offered the affidavit of Jacqueline Jefferis, an employee of Transworld Systems, Inc. (TSI), which was the "loan subservicer" for U.S. Bank, National Association, which the court identified as the "Special Servicer" working for NCSLT.


In a sworn statement, Ms. Jefferis' said she was familiar with TSI's business practices regarding loan records. But, as the Indiana Court of Appeals pointed out:

[T]he Jefferis affidavit provided no testimony to support the admission of the contract between Holmes and Charter One Bank or the schedule of pooled loans sold and assigned to National Collegiate Funding, LLC, and then to NCSLT . . . . There was no testimony to indicate that Jefferis was familiar with or had knowledge of the regular business practices or record keeping of Charter One Bank, the loan originator, or that of NCSLT regarding the transfer of pooled loans . . . . [Emphasis added by me.
In other words, as far as the appellate court was concerned, Ms. Jefferis didn't know nuthin' about no loan from Charter Bank to Mr. Holmes. Consequently, the trial court's judgment against Mr. Holmes was reversed.

Why is the Holmes case, decided by an Indiana state court, important to other student-loan debtors? Three reasons:


I. The private student-loan industry is bundling student loans and selling them to investors


First, the private student-loan industry has been packaging student loans into bundles (or pools) and selling them to third parties, and these third parties often then sell these bundled loans to yet other parties. In fact, these loans can have multiple owners.


In this flurry of transactions, the paperwork often gets mislaid or lost. Sometimes the companies suing student-loan debtors for payment do not have the critical documents necessary to show that they have the legal right to collect on the debt.


This confusion sometimes occurs due to "robo-signing," the mindless signing of documents by people who are not familiar with the original transactions. This was a significant issue during the home-mortgage crisis of 2008, and judges sometimes dismissed home-foreclosure suits because the parties trying to foreclose on houses could not prove they were entitled to grab someone's home.


Thus, anyone who is sued by a company trying to collect on a private student loan should demand that the suing party show that it is the legal entity entitled to sue for the money. Fortunately for Mr. Holmes, NCSLT was unable to show that it was the party that had legal standing to sue him.

II. Student-loan debtors need good lawyers


This brings me to the second reason the Holmes case is significant for other student-loan debtors. Mr. Holmes defeated NCSLT on a technicality. Specifically, NCSLT's documentation did not pass muster with Indiana Evidence Rule 803(6). But only a competent lawyer would know how to make the technical argument that benefited Mr. Holmes.


I once thought that student-loan debtors with the right facts could go into court without lawyers and be successful. And indeed, some debtors have won their cases in federal bankruptcy courts over the ruthless opposition of the debt collectors' lawyers.


But many of these cases turn on legal technicalities that a nonlawyer could not be expected to know. The Holmes case was based on Indiana law, but federal bankruptcy law also has technicalities that nonlawyers will find very difficult to master.


That is why I was heartened by the decision of the Massachusetts Bar Association to organize teams of volunteer lawyers to represent student-loan debtors in bankruptcy courts. If student-loan debtors can get good lawyers, they will have a far better chance of winning their cases than if they go to court without legal counsel.


III. Never co-sign your children's student loans


There's a third lesson to be learned from the Holmes case. Mr. Holmes co-signed a student loan with his son Nicholas to enable Nicholas to enroll at the University of Southern Indiana. In my view, that was a mistake. If Nicholas couldn't figure out a way to attend a regional state university without having his dad co-sign a student loan, then Nicholas needed to figure out another way to go to college.

I've said this before, and I'll say it one more time. Parents should never co-sign their children's student loans. Never. Never. Never.


Note: My thanks to Steve Rhode for calling my attention to Holmes v. 
NCSLT.




References


Alexander Holmes v. National Collegiate Student Loan Trust (Ind. Ct. App. Feb. 27, 2018).

Steve Rhode. Perfect Example Why Most National College Student Loan Trust Lawsuits are BS. Getoutofdebtguyorg., March 1, 2018.




Wednesday, July 19, 2017

Missing Paperwork for Private Student Loans May Make Them Uncollectible: Boo Hoo!

Some debt collectors for private student loans are finding it difficult to collect because they can't prove they actually own the debt.  According to the New York Times, "Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing."

A little background. The federal government is the largest student-loan lender; it now holds $1.4 trillion in outstanding federal-loan debt.  But there is also a smaller private student-loan market. About $108 billion is private student loans is held by banks and private financial agencies like Sallie Mae.

National Collegiate Student Loan Trusts, an umbrella name for 15 trusts, holds about $12 billion of the total private student-loan debt. More than 40 percent of that debt--$5 billion--is in default; and National  Collegiate has been aggressively pursuing defaulters in court. According to the Times, the trusts brought 800 collection cases last year--an average of 4 a day.

But National Collegiate has a big problem: when it goes to court it often cannot prove it is legally entitled to collect on the debt. How did that happen?

Many of these student loans were taken out more than 10 years ago by dozens of private banks. These loans were then bundled together into securities and sold to investors. A lot of this debt was sold and resold several times before it wound up in the hands of National Collegiate's trusts.

Somewhere along the way, a lot of important paperwork got lost, and now National Collegiate often can't prove it owns the underlying debt it seeks to collect. As a result hundreds of its debt collection cases have been thrown out of court. Boo hoo!

This is essentially the same problem that arose during the home mortgage crisis of 2008. Home mortgages were packaged into asset-backed securities and then sold and resold to various investors. When the loans went into default, the owners of the repackaged mortgages often could not prove they were entitled to collect the debt.

I have a few comments on National Collegiate's troubles.

First, the federal government doles out $150 billion a year in student aid. No one should be going to private lenders for student-loan money. If the higher education industry had any integrity, it would discourage students from taking out private loans. But our rapacious colleges and universities don't care if their students are taking out private loans to pay tuition.

Second, the private student-loan market grew after Congress passed the so-called Bankruptcy Reform Act of 2005, which made private student loans nondischargeable in bankruptcy unless the borrower could prove undue hardship. The banks know that their student-loan customers will find it almost impossible to discharge their private loans in bankruptcy.

Third, the banks have further protected themselves against losses by requiring student borrowers to find co-signers for their student loans. Millions of parents and grandparents have cosigned private loans for their relatives and are liable to repay them if the student defaults. And bankruptcy isn't an option for grandma or grandpa because they too are subject to the undue hardship rule.

In short, the private student loan industry is a sleazy business and ought to be shut down. Congress could close this industry almost overnight if it repealed the undue hardship standard in the 2005 Bankruptcy Reform Act.  And colleges and universities could help shut the industry down if they would publicly discourage their students from taking out private loans.

Personally, I don't give a damn if National Collegiate and its investors lose a ton of money because they don't have the paperwork proving they own the student loans they purchased.  After all, National Collegiate is a sophisticated party. If it purchased debt without obtaining the necessary documents proving ownership, it deserves to have its collection cases thrown out of court.



References

Stacy Cowley and Jessica Silver-Greenberg. As Paperwork Goes Missing, Private Student Loan Debt May Be Wiped Away. New York Times, July 17, 2017.