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

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

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

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

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

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

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

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

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

Let's review the evidence one more time:

• The two-year student-loan default rate (the percentage of students from the most recent cohort who default on their loans within two years of beginning repayment) doubled in just seven years, according to DOE's own data. In 2007, DOE reported a two-year default rate of 4.7 percent. In 2013, the two-year default rate was 10 percent.

• Almost 9 million people in the repayment phase of their loans have economic-hardship deferments and are not making payments on their student loans. Meanwhile, their loan balances are increasing due to accruing interest.

• About 1.5 million people have signed up for income-based repayment plans, but more than half of them have already dropped out due to the fact that they didn't file their obligatory annual income reports.

We can tinker with the student-loan program in many ways as the Department of Education and the policy tanks are now doing. But the fact remains that millions of student-loan debtors are under water financially and have basically dropped out of the economy. This reality is illustrated by the fact that more that half of the people in the generous income-based repayment programs are not bothering to file their annual income reports.

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

Bleep it, Dude. Let's go bowling. 

References

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

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

No Statute of Limitations on Student Loan Debt: How Can That Be Justified?



Abandon hope, all ye who enter here. 

                                 Dante Alighieri 

Awhile back, Governor Jerry Brown vetoed a bill passed by the California legislature  that would have expanded the statute of limitations for bringing sexual abuse lawsuits against private schools, including schools operated by the Catholic Church. The law did not apply to sexual abuse claims against public school teachers.


Cartoon Credit: Carol Simpson

In vetoing the statute, Governor Brown invoked ancient principles of fairness that put time limitations on lawsuits. "Statutes of limitation reach back to Roman law and were specifically enshrined in the English common law by the Limitations Act of 1623," Governor Brown wrote in his veto message. "Ever since, and in every state, including California, various limits have been imposed on the time when lawsuits may still be initiated. Even though valid and profoundly important claims are at stake, all jurisdictions have seen fit to bar actions after a lapse of years."

Statutes of Limitations Invoke Ancient Principles of Fairness

Governor Brown correctly stated the law regarding statutes of limitations. It is not fair, as the courts sometimes put it, for aggrieved parties to “sleep on their rights” and then file a lawsuit long after a claim has grown stale, when memories and witnesses may have faded away and critical documents may have been lost. Thus, all states give claimants a specific time limit for filing a lawsuit. If the claimant fails to file within the time limit, the claimant irrevocably loses the right to seek a remedy in court.

Unfortunately for student loan debtors, these ancient principles of fairness do not apply to student loans. In 1991, Congress passed 20 U.S.C. § 1091a, a statute that abolished all limitation periods that might otherwise apply against specified lenders and governmental entities that seek to collect on student loans. As one scholar succinctly summarized the law, “[O]nce a student contracts for a student loan, the student cannot use a statute of limitations as a defense against collection on that loan by the entities listed in the statute—ever” (Roper, 2005, p. 37, emphasis supplied).

The Fabrizio case: Student-Loan Guarantor Attempts to Collect a 25-Year-Old Judgment

In 2010, this harsh federal law was applied in a case against Anthony Fabrizio, who borrowed about $9,000 in the early 1970s to help pay for his postsecondary education (New York State Higher Education Services Corporation v. Fabrizio, 2010). Apparently, Fabrizio did not pay back the money, and the lender obtained a default judgment against him in 1983 for $9,664.63. In 2008, twenty-five years after the debt had been reduced to judgment, the New York State Higher Education Services Corporation, which (through a predecessor agency) had guaranteed Fabrizio’s loan, told Fabrizio to begin paying off the debt or the agency would start garnishing his wages.

Fabrizio tried to persuade a New York court to enter an order declaring that his debt was deemed paid under a New York law stating that a money judgment is presumed to have been paid after 20 years from when the creditor was first entitled to enforce it.

Unhappily for Mr. Fabrizio, a New York appellate court ruled against him, finding that 20 U.S.C. 1091a, abolishing all statutes of limitation that might otherwise protect a defaulted student-loan debtor, overrode the New York statute of limitation.  Fabrizio can still be made to pay back the loan. Presumably, he is also liable for collection fees and more than 30 years of accumulated interest.

Defaulting Student Loan Debtors Have No Place to Hide

Today, there are millions of people who have defaulted on their student loans, and some of those loans are now quite old. Nevertheless, student-loan defaulters are never off the hook for their debt--no matter how old that debt might be.

As the Fabrizio case illustrates, statutes of limitation do not apply to student-loan debts that are guaranteed by the federal government, and a lender can pursue collection at any time, even if the lender took no action for a quarter of a century.

Moreover, unlike most other overburdened debtors, student-loan debtors cannot discharge student loans in bankruptcy unless they can show that failure to discharge their student loans will cause them “undue hardship”  (11. U.S.C. § 523(a)(8)(B)). As several scholars have observed, it is very difficult for student-loan debtors to discharge their student loans in bankruptcy--even in heart-rending circumstances (Pardo & Lacey, 2009, Fossey, 1997). 

In fact, student-loan debtors who fail to repay their loans can have their Social Security checks garnished, a practice that the Supreme Court approved in the 2005 decision of Lockhart v. United States.  People who took out student loans in their early twenties and never paid them back can see their Social Security income diminished by their failure to discharge their student-loan obligations (Cloud, 2006).

Abandon Hope, All Ye Who Enter Here

For millions of college students, the federal student loan program has become a nightmare. Over the years, Congress has passed harsh legislation that has stripped student-loan debtors of traditional legal protections like statutes of limitation and unfettered access to the bankruptcy courts.  As a result, for individuals who default on their student loans, even those who took out their loans in good faith, the famous passage from Dante seems chillingly appropriate: “Abandon hope, all ye who enter here.”  

**********

Note: Parts of this essay were taken from an essay originally published in 2010 in Teachers College Record.  The citation for the original article is Richard Fossey & Robert C. Cloud, Abandon Hope, All Ye Who Enter Here: Defaulting Student Loan Debtors Have No Place to Hide. Teachers College Record, October 12, 2010 at http://www.tcrecord.org, ID Number: 16195.

References

Chae v. SLM Corporation, 593 F.3d 936 (9th Cir. 2010).

Cloud, R.C. (2006). Offsetting Social Security benefits to repay student loans: Pay us now or pay us later, Education Law Reporter, 208, 11-21.

Fossey, R. (1997).  "The certainty of hopelessness:" Are courts too harsh toward bankrupt student loan debtors?  Journal of Law and Education, 26, 29-48. 

Garner, B. A. (Ed.). (9^th ed. 2009). Black’s Law Dictionary. St. Paul, Minn.: West Publishing Company.

Lockhart v. United States, 546 U.S. 142 (2005).

Joseph Mack (2006). Nullum Tempus: Governmental immunity to statutes of limitation, laches, and statutes of repose. Defense Counsel Journal, 73, 180-196.

New York Higher Education Services Corporation v. Fabrizio, 900 N.Y.S.2d (A.D. 3 Dept. 2010).

Raphael I. Pardo & Michelle R. Lacey (2009).  The real student-loan scandal: Undue hardship discharge litigation.  American Bankruptcy Law Journal, 83, 179-235.

Glen E. Roper (2005). Eternal student loan liability: Who can sue under 20 U.S.C. 1091a? Brigham Young University Journal of Public Law, 20, 35-78.

It is madness to borrow money for six years to get a four-year college degree

Complete College America, a nonprofit public advocacy group located in Indianapolis, issued a report recently entitled Four-Year Myth. The report starkly documents what everyone in higher education already knows: The vast majority of college students do not complete their four-year degrees in four years.

Here are some of the report's key findings:

• Only 5 percent of students in two-year associate degree programs graduate on time.

• Only 19 percent of students in four-year programs at non-flagship universities obtain their degrees within four years.

• At flagship institutions, where the nation's top students attend college, only 36 percent of the students complete their four-year degrees on time.

Moreover, the report points out, a lot of students accumulated significantly more credit hours than they need to graduate.  On average, students at non-flagship institutions have 133 credits on their transcripts although most need only about 120 credit hours to graduate.

The report acknowledges that there are many good reasons why many students cannot graduate on time.  Nevertheless, as the report succinctly stated, "[S]omething is clearly wrong when the overwhelming majority of public colleges graduate less than 50 percent of their full-time students in four years."

The report lists several reasons for the low on-time graduation rates at most public colleges and universities:

• Lighter course loads.  Many students don't take enough credits while in school to graduate on time.  A full course load at most colleges is 15 credit hours per semester, but only 50 percent of the students at four-year institutions take a full course load.  Only 29 percent of students in two-year programs take full course loads.

• Remediation courses.  According to the report, 1.7 million students take remediation courses each year but only 1 out of 10 remedial students graduate.

• Uninformed choices.  Too many students make poor choices when enrolling for classes, which causes them to take courses that won't move them toward on-time graduation.  Part of this problem can be attributed to an inadequate number of counselors at many universities.

/As Four-Year Myth points out, students who take six years to obtain a four-year degree often have significantly more student-loan debt than students who graduate on time.  At the University of Texas, for example, students who graduate on time accumulate on average about $19,000 in debt. Students who take six years to graduate are burdened (on average) with $32,000 in student loans.

Four-Year Myth is a very useful report, but in my mind, it did not place enough emphasis on the role that student loans play in the downward slide of on-time graduation rates.  I believe a lot of unmotivated students are taking just enough credit hours to qualify for student loans without realizing that they are accumulating a lot of unnecessary debt by taking a more leisurely path toward graduation. When a mandatory course is unavailable to them in a given semester, some of them will enroll in an unnecessary course solely to meet the minimum number of hours they need to qualify for student loans.

The report makes several good suggestions for improving on-time graduation rates, which I will not repeat here. But I would like to add an additional suggestion: The federal student loan program should only be available to a student for a maximum of four years of full time study.  Thus, students in four-year programs who take six years to graduate or students who take longer than four years to graduate because they changed colleges or changed majors should be required to pay the cost for delayed graduation out of their own pockets if those costs exceed the cost of being enrolled full time for four years.

Call it tough love if you like. But the federal government is doing America's young people no favor by allowing them to borrow money semester after semester while they wander around colleges and universities for five, six, or seven years when they are enrolled in four-year degree programs.

And we should pay special attention to one of the report's most shocking findings: Only 5 percent of students enrolled in two-year associate degree programs graduate on time.  Our community colleges, which purport to serve disadvantaged students, have fallen down on the job if they cant' get their on-time graduation rates above five percent.

References

Four-Year Myth. Complete College America, 2014. Accessible at: file:///C:/Users/wrf7707/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.IE5/9UM6POWU/4-Year-Myth.pdf

Tamar Lewin. Most Don't Earn Degree in Four Years, Study Finds.New York Times, December 2, 2014, p. A14. 

Occasionally, The New York Times Says Something Sensible About the Student Loan Crisis: Bankruptcy Relief for Private Student Loan Borrowers

Last month, the Student Loan Ombudsman for the Consumer Financial Protection Bureau (CFPB)issued a report highlighting the hardships experienced by students who took out private loans to attend college. Unlike the federal student loan program, which offers income-based repayment plans and economic hardship deferments to student-loan borrowers who run into financial trouble, private lenders generally do not offer any type of relief for distressed student-loan borrowers.

What the CFPB did not say in its report is that private student-loan borrowers, like borrowers in the federal student loan program, cannot discharge their student loans in bankruptcy unless they can show "undue hardship," a very difficult standard to meet.
All the CFPB report offered as a remedy to this problem was a form letter that student-loan borrowers could modify and send to their private lenders to beg for relief.  That is really not much of a solution.

Yesterday, however, the New York Times commented on the CFPB report and made a sensible suggestion. The Times proposed that Congress repeal the 2005 "undue hardship" provision that makes it almost impossible for private student-loan borrowers to discharge their loans in bankruptcy. In the alternative, the Times added, legislation should be passed that requires private lenders to modify loan terms for distressed student-loan borrowers. "Now it's time for Congress to fix [the error it made when it passed the 2005 law]," the Times editorialized, "by rescinding the bankruptcy provision or requiring lenders to create clearly advertised flexible payment plans in exchange for retaining it."

Respected commentators have recommended rescinding the 2005 Bankruptcy Code provision for years. In 2009, Rafael Pardo, a law professor and noted researcher on the student-loan crisis, testified before a Congressional committee on the special hardships suffered by individuals who took out private student loans to finance their college studies.  Here is what Professor Pardo said:

Because the costs of private student loans can quickly spiral out of control, and because there exist limited nonbankruptcy options for mitigating the financial distress imposed by such costs, borrowers of private student loans are particularly vulnerable to the negative effects of undue-hardship discharge litigation.  If they end up seeking relief through the bankruptcy system and subsequently fail to prevail in their claim of undue hardship, they will find themselves struggling interminably under an oppressive amount of educational debt with little to no other options for relief.

In short, Professor Pardo told the Congressional committee:

By stripping away the one social safety net that existed for borrowers of private student loans--that is, the automatic discharge of such loans in bankruptcy--Congress has likely condemned certain student-loan debtors to the Sisyphean task of repaying obligations that will never be extinguished. [Emphasis supplied.]

In his testimony, Professor Pardo stated unequivocally that Congress should repeal the 2005 "undue hardship" provision that has made it almost impossible for individuals to discharge their private student-loan debts in bankruptcy.  Pardo testified as follows:

I respectfully urge Congress to restrike the balance between student-loan debtors and lenders of private student loans by restoring the automatically dischargeable status of private student loans in bankruptcy.

Without a doubt, repeal of the 2005 Bankruptcy Code provision is essential to providing relief to distressed college borrowers who took out private student loans.  It is refreshing to see that the New York Times essentially agrees with Professor Pardo on this issue, although the Times equivocated a bit by saying that Congress might pass a law requiring private student-loan lenders to offer flexible payment terms as an alternative to repealing the 2005 Bankruptcy Code provision.

Everyone in higher education should be clamoring for repeal of the Bankruptcy Code's "undue hardship provision for all student-loan borrowers, whether they borrowed from the federal student loan program or borrowed from private lenders.  Literally millions of distressed student-loan borrowers are suffering  because they cannot repay their loans and have no real means of relief in the bankruptcy courts.

But if across-the-board reform cannot be achieved politically, at least Congress should repeal the "undue hardship" provision as it applies to people who took out student loans from the private banks. Even the New York Times, which at times seems almost clueless about the student-loan crisis, has figured that out.

References

Editorial. Driving Student Borrowers Into Default. New York Times, November 3, 2014.

Rafael Pardo. ABI Members Testify on Discharging Student Loan Debt in Bankruptcy. ABI Journal, November 2009, p. 10. Accessible at: http://www.abiworld.org/AM/Template.cfm?Section=Home&CONTENTID=59097&TEMPLATE=/CM/ContentDisplay.cfm

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

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

Lisa Mason
Photo credit: Steve Mason &
USA Today

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

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

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

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

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

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

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

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

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

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

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

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

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

References

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

References

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

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

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

"Naked to mine enemies": A modest proposal to help destitute student-loan debtors get attorneys to represent them in bankruptcy court

A great many destitute student-loan debtors file for bankruptcy without the aid of an attorney. This is not surprising since the only reason these poor people are in a bankruptcy court is because they're broke.

For example, Janet Roth, whose case I discussed in an earlier blog, appeared before the Ninth Circuit's Bankruptcy Appellate Panel without a lawyer.  At the time of the bankruptcy proceedings, Ms. Roth was living on her monthly Social Security check--only $774 a month. Obviously, she had no money to pay an attorney to  represent her in bankruptcy.



Bankrupt student-loan debtors need lawyers
Photo credit: carinsurancecomparison.org

On the other hand, student-loan creditors--agencies like Educational Credit Management Corporation and Sallie Mae--always appear in bankruptcy court with excellent attorneys. The creditors' lawyers know bankruptcy law inside and out, and they typically argue that the poor saps who enter bankruptcy are not entitled to a discharge of their student-loan debts. I don't know how these lawyers sleep at night, but I hope they sleep badly.

This inequity of legal resources obviously works to the student-loan debtor's disadvantage. Indeed, a study by Pardo and Lacy (2009) found that student-loan debtors got better outcomes in bankruptcy if they were represented by experienced bankruptcy lawyers.

Occasionally, indigent student-loan debtors obtain informal legal support from attorneys or non-lawyers with bankruptcy expertise. These people may "ghost write"  a debtor's pleadings without formally representing the debtor in court.

But some courts frown on this practice. In a bankruptcy decision filed this year, a federal court in Virginia strongly condemned the practice of ghost writing. "The Court emphasizes that the practice of ghost-writing is in no way permissible in the Eastern District of Virginia, or any federal court for that matter," the court wrote. In the court's view, such conduct amounted to "the unauthorized practice of law" (Greene v. U.S. Department of Education, 2013, *26-27).

I would like to make a modest proposal for getting better legal representation for bankrupt student-loan debtors. Currently, the law schools are turning out far more lawyers than the job market needs. In fact, a few law schools have been sued by their alumni for allegedly making false representations about their  graduates' job prospects.

Why don't these law schools organize legal aid clinics that specialize in representing bankrupt student-loan debtors?  There are certainly enough unemployed lawyers to staff these clinics. The clinics would employ lawyers who would otherwise be unemployed and give them some legal experience that would later help them obtain permanent employment.

Law schools might consider the sponsorship of legal aid clinics for student-loan debtors as a sort of penance for their hubris.  It is now well established that third- and fourth-tier law schools charged high tuition rates to students who had only dim prospects of ever getting jobs that would pay well enough to allow them to comfortably pay back their student loans. Wouldn't it be a good thing for these law schools to do something positive to ease the plight of overburdened student-loan debtors?


References

Greene v. United States Department of Education, 2013 U.S. Dist. LEXIS 143678 (E.D. Va. Oct. 1 2013)

In re Roth, 490 B.R. 908 (9th Cir. BAP 2013).

Raphael Pardo & Michelle Lacey. The Real Student-Loan Scandal: Undue Hardship Litigation. 83 American Bankruptcy Law Journal 179 (2009). The American Bankruptcy Law Journal

Educational Credit Management Corporation makes good money chasing destitute student-loan debtors: The Obama Administration should take action

Richard Boyle, CEO of ECMC
He made $1.1 million in 2010

Educational Credit Management Corporation is a nonprofit company that collects on defaulted student loans for the federal government. Just because it is nonprofit, however, doesn't mean its employees don't make a lot of money. According to a news story posted on Bloomberg.com, Richard Boyle, ECMC's chief executive officer, made $1.1 million in 2010.

Other ECMC employees are also making good money.  Dave Hawn, ECMC's chief operating officer, made about half a million dollars in 2010. Joshua Mandelman, an ECMC debt collector, made $454,000. And ECMC directors also do pretty well. According to the Bloomberg story, they make as much as $90,000 a year.

How does ECMC make its money? It gets a small fee for helping distressed student-loan borrowers avoid default. But it makes much more money when it collects money from student borrowers who defaulted. By law, ECMC (and other similar companies) "can receive as much as 37 percent of a borrower's entire loan amount, half in collection costs and half in taxpayer-funded commissions" (Bloomberg.com).

What a sleazy business.  People are getting rich chasing down student-loan defaulters, many of whom are unemployed and destitute.

But perhaps the most disturbing aspect of ECMC's business is the position it takes when student-loan debtors file for bankruptcy. In several cases, ECMC has argued that bankrupt student-loan debtors should not have their loans discharged in bankruptcy. Instead, ECMC has argued, these debtors should be placed in income-based repayment plans that can last as long as 25 years.

Roth case: Elderly woman with health problems seeks bankruptcy relief from student loans

For example, in a recent case, Janet Roth, a 64-year old woman, filed for bankruptcy, seeking to discharge $95,000 in student loan debt.  Actually, she only borrowed $33,000, but her debt tripled due to fees and accrued interest.

At the time of the bankruptcy proceedings, Roth was unemployed and living entirely on her monthly Social Security check--only $774.  In addition, she suffered from several serious health conditions, including diabetes, macular degeneration, and depression.

Now most people would think that Ms. Roth was a good candidate for bankruptcy. But in court proceedings, ECMC challenged her request for bankruptcy relief from her student loans. ECMC argued she should have signed up for a 25-year income-based repayment plan, a plan that would have ended when she was almost 90 years old!

Fortunately, the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals was sympathetic to Ms. Roth's plight. The court said Ms. Roth had acted in good faith regarding her student-loan obligations, and it discharged her of the debt.

Can you imagine? A company run by a guy who makes more than a million dollars a year argued that an elderly woman with health issues and living on her Social Security check should make monthly payments on her student loans for 25 years! These ECMC guys make Ebenezer Scrooge look like Mother Teresa.

Want another example? In In re Stevenson (2011), an elderly woman with a history of homelessness  and who was living on less than $1,000 a month, was denied relief from her student-loan debt by a bankruptcy court in Massachusetts. ECMC opposed her effort to have her student loans discharged, and a court essentially forced Ms. Stevenson into a 25-year income-based repayment plan. Like Ms. Roth, Ms. Stevenson will be nearly 90 years old when her student-loan debt is discharged.

And take a look at the Krieger case. In Krieger v. Educational Credit Management Corporation (2013), ECMC opposed the discharge of a 53 year old woman's student-loan debt even though she was unemployed and had never made more than $12,000 a year during her entire working life.

President Obama Should Take Executive Action to Aid Elderly Student Loan Debtors

Ms. Roth, Ms. Stevenson and Ms. Krieger are not alone. According to a report prepared for the Federal Reserve Bank of New York, about five percent of people who are behind on their student-loan payments are 60 years old or older. Undoubtedly, many of these people are living almost solely on their Social Security checks or are destitute.

Surely, elderly student-loan defaulters are entitled to some relief. Unfortunately, their Social Security checks are subject to garnishment, and some of them are running into opposition when they file for bankruptcy.

President Obama likes to get things done through executive orders.  So how about this for a plan? President Obama should direct all student-loan collection agencies not to oppose elderly people's efforts to discharge their student loans in bankruptcy.  And he should stop the garnishment of elderly people's Social Security checks for the purpose of collecting on student loans.

President Obama can talk all he wants about how he wants to ease the burden on people who borrow money to attend college. But there are things he can do--simple things--that would ease the burden on elderly student-loan defaulters. So why doesn't he take action?

References

John Hechinger. Taxpayers Fund $454,000 Pay for Collector Chasing Student Loans. Bloomberg.com, May 15, 2013. Accessible at: http://www.bloomberg.com/news/2012-05-15/taxpayers-fund-454-000-pay-for-collector-chasing-student-loans.html

Brown, M., Haughwout, A., Lee, D., Mabutas, M., and van der Klaauw, W. (2012). Grading student loans. New York: Federal Reserve Bank of New York. Accessible at: http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html

Krieger v. Educational Credit Management Corporation, 713 F.3d 882 (7th Cir. 2013).

Lockhart v. United States, 546 U.S. 142, 126 S. Ct. 699 (2005).

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP 2013).

Stevenson v. Educational Credit Management Corporation, 463 B.R. 586 (Bankr. D. Mass. 2011). 

A For-Profit College president is charged with a felony: Should Taxpayers Be Supporting Dade Medical College?

Last week, Miami prosecutors charged Ernesto Perez, President of Dade Medical College, with failing to report criminal arrests on a government form, which is a felony offense.  Specifically, Perez was charged with failing to report his conviction for battery and exposing himself to a child for a 1990 incident that took place in Wisconsin. He also failed to report his arrest in 2002 for aggravated assault. In addition, prosecutors charged Perez with two misdemeanor counts of perjury.

Ernesto Perez
Former President of Dade Medical College

Prior to this bump in the road, Perez was doing pretty well for himself.  He had twice  been appointed to the Florida Commission on Independent Education, the state agency charged with regulating for-profit colleges in Florida.  Last summer the South Florida Business Journal gave him an Ultimate Miami CEO Award for his "significant contributions to the local community." Not bad for a guy who dropped out of high school to join a heavy metal band.

Dade Medical College is a for-profit college with  2,000 enrolled students on five campuses. In 2012, the college received 87 percent of its revenues from federal aid--$33 million (according to a story in Huffington Post). The college attracts low-income Hispanics and African Americans who pay high tuition.  The vast majority of DMC students receive federal loans or Pell grants, and  25 percent of student borrowers default on their federal student loans within three years of beginning repayment.

Do Dade Medical College students receive good value for their tuition? Maybe not. The Florida Nursing Board put two of its campus nursing programs on probation this year due to low pass rates by DMC graduates on state licensing exams. One student who was interviewed by the Broward/Palm Beach/New Times said she had taken out $48,000 in federal student loans and yet she had professors who merely gave Powerpoint presentations or read from a book.

 Dade Medical College is a prime example of what's wrong with for-profit colleges in the United States.  Run by a high-school dropout and lavishly funded by the federal government, the college has high failure rates on nursing exams and high student-loan default rates.

Why is the federal government funding for-profit institutions like Dade Medical College? Maybe because the for-profit college industry is politically powerful.  Mr. Perez and his wife are big campaign contributors and have made contributions to Barack Obama, Mitt Romney, Harry Reid, and Marco Rubio. 

President Obama and Congress can talk all they want about quality controls on higher education. But the federal government is pumping billions of dollars a year into for-profit colleges and universities that prey on low-income students, provide poor quality education and have high student-loan default rates.  This is a huge scandal that our politicians refuse to address.

References

Patricia Born & Jay Weaver. Homestead mayor's ties to downtown redeveloper probed. Miami Herald, June 8, 2013. Accessible at: http://www.miamiherald.com/2013/06/08/v-fullstory/3441091/homestead-mayors-ties-to-downtown.html

Read more here: http://www.miamiherald.com/2013/06/08/v-fullstory/3441091/homestead-mayors-ties-to-downtown.html#storylink=cpy

Francisco Alvarado. Dade Medical College Has Powerful Friends but Struggling Students.  Broward/Palm Beach  New Times, August 29, 2013.  Accessible at: http://www.browardpalmbeach.com/2013-08-29/news/dade-medical-college-has-powerful-friends-but-struggling-students/

Dade Medical College.  Ernesto Perez to be Honored at SFBJ CEO Awards. 2013. Accessible at: http://www.dademedical.edu/rightnow/ernestoperezbehonoredsfbjceoawards

David Halperin. $33 Million Per Year of Your Tax Money to For-Profit College Whose CEO Hid Criminal Record. Huffington Post, October 21, 2013. Accessible at: http://www.huffingtonpost.com/davidhalperin/33-million-per-year-of-yo_b_4136451.html

Michael Vasquez. Amid criminal charges, CEO of Dade Medical College Resigns. Miami Herald, October 23, 2013. Accessible at: http://www.miamiherald.com/2013/10/23/3706821/ernesto-perez-resigns-as-head.html

 

Read more here: http://www.miamiherald.com/2013/10/23/3706821/ernesto-perez-resigns-as-head.html#storylink=cpy

 

The Brookings Institution Makes A Proposal for Student Loan Reform: Let's Turn College Graduates Into Sharecroppers

The Hamilton Project, a public policy initiative sponsored by the Brookings Institution, issued a report this month that offers some promising ideas for reforming the federal student loan program. At the same time, not all of the ideas are good.

The Hamilton Project Proposal in a Nutshell

In a nutshell, the Hamilton Project proposes a simple income-based repayment plan for student borrowers that will replace the hodgepodge of repayment options now in place. Students will make loan payments based on a percentage of their income for a maximum of 25 years. Any unpaid balance owing at the end of this 25 year period will be forgiven with no tax consequences for the debtor.

Loan payments would be paid through a payroll deduction similar to Social Security deductions and debtors would be free to make larger loan payments than the minimum if they want to pay off their loans early. The proposal calls for the government to manage the repayment program instead of contracting out this work to private loan servicers.

In addition, the Hamilton Project recommends the elimination of interest subsidies for low-income borrowers while they are in school. The authors point out that these subsidies do nothing to increase the number of low-income students who enroll for college since the subsidy doesn't really benefit them until they enter the loan-repayment phase.  In the authors' opinion, money spent on subsidizing interest rates should be directed toward grants.



Long-Term Student-Loan Repayment Plans Will Create a New Class of Sharecroppers
Sharecropper cabin, 1936
Photo by Carl Mydans

Finally, the Hamilton Project proposes important reforms for the private student-loan industry.  Most significantly, the Project recommends the repeal of a 2005 Bankruptcy Code provision that makes it almost impossible for borrowers to discharge private student loans in bankruptcy.  The Project recommends that private student loans be treated like any other unsecured debt in bankruptcy.

The Hamilton Project's Proposal Contains Some Good Ideas

I like some of the Hamilton Project's proposals.  First of all, I heartily endorse the Hamilton Project's proposal for providing better bankruptcy protection for people who took out private loans from the banks. Congress made a mistake when it amended the Bankruptcy Code in 2005 to make it almost impossible for debtors to discharge their private student loans in bankruptcy. As I have said before, repealing the 2005 provision would probably have the salutary effect of driving the banks out of the private student- loan business.

I also like the Hamilton Project's proposal for simplifying the process for student debtors to participate in an income-based repayment plan and for having the government handle loan repayments through payroll deductions rather than having private student-loan servicers manage the repayment process.  Some of the private loan servicers are harassing delinquent student-loan debtors, and I would like to see their operations shut down.

Flaws in the Hamilton Project's Proposal

But  the Hamilton Project's proposal has some flaws.  First and most importantly, the plan calls for student-loan repayment obligations to stretch out for as long as a quarter of a century. In essence then, student-loan debtors will become sharecroppers for the government, paying a portion of their wages over most of their working lives in return for the privilege of going to college. I am opposed to lengthy income-based repayment plans as a matter of principle.

And, as I have said before, income-based repayment plans reduce students' incentives to borrow as little as possible and they reduce the colleges' incentives to keep their costs down.

The Hamilton Proposal is Based on a False Assumption

The Hamilton Proposal is based on the premise that most students don't borrow that much money, and thus they should have no trouble paying off their loans under an income-based repayment plan in just a few years. It points out that almost 70 percent of student-loan debtors borrow less than $10,000.

But as the Hamilton Project acknowledged in footnote 7 of its report, by the time people go into default, they owe considerably more than they borrowed due to penalties and accruing interest. If interest rates accrue for low-income borrowers while they are in school or if low-income borrowers' income-based payments are too low to cover accruing interest, then the amount of their debt will become larger--probably much larger--than they originally borrowed.

Conclusion: Some of the Hamilton Project's Proposals Have Promise, But We Should Avoid Putting Student Loan Debtors in Long-Term Repayment Plans

Some of he Hamilton Project's proposals have promise.  Restoring bankruptcy protection for private student-loan borrowers and eliminating the private student-loan repayment servicers are good ideas.

But the people who have been hurt the most by the federal student loan program are young people who attended for-profit colleges. As the Hamilton Project pointed out, people under 21 years of age have the highest loan default rates of any age group, and we know from many sources that people who attended for-profit colleges have the highest student-loan default rates.

The Hamilton Project's proposal is likely to put a lot of young, low-income people into long-term repayment plans they will never pay off.  And many of these long-term debtors--perhaps most of them-will be people who attended expensive for-profit colleges.

We simply must shut down the for-profit colleges.  Otherwise, the Hamilton Project's proposal for putting student-loan debtors in 25-year repayment plans will likely created a 21st century version of indentured servants--people who attended for-profit colleges that were too expensive and who will spend the majority of their working lives paying for college experiences that did not enable them to earn a salary large enough to quickly pay off their student loans.

References

Susan Dynarski and Daniel Kreisman. Loans for Equal Opportunity: Making Borrowing Work for Today's Students. Hamilton Project, Brookings Institution, October 2013. Accessible at: http://www.brookings.edu/~/media/research/files/papers/2013/10/21%20student%20loans%20dynarski/thp_dynarskidiscpaper_final.pdf

Another Day Older and Deeper in Debt: A Sobering Report on Student Indebtedness from the National Center for Education Statistics

If young people will just go to college, the higher education industry assures us, everything will work out fine for everyone.

 Indeed that was the message delivered in a recent New York Times op ed essay. Jonathan Cowan and Jim Kessler,  executives of Third Way, a so-called "centrist" policy organization, argued that the problem of stalled wages and growing income equality in the U.S. is being solved  because more people are going to college.

But reams of studies and reports cast doubt on this Pollyannaish notion. Earlier this month, the National Center for Education Statistics (NCES) released a report indicating that the economic

Pollyanna:
Just go to college and
everything will work out fine.

picture for college graduates is getting worse. Here are some highlights from the report, authored by Jennie Woo.

• The percentage of college graduates who borrowed for their undergraduate education went up from 49 percent among people who graduated in 1992-1993 to 66 percent for people who graduated in 2007-2008.

• Among college graduates, the average amount borrowed went up from $15,000 for the 1992-1993 cohort to $24,700 for people who graduated in 2007-2008

• Among people who graduated from for-profit institutions in 2007-2008, 90 percent had taken out student loans.

• In 2001, about two-thirds of college graduates were making payments on their loans one year after graduating. In 2009, that figure had dropped to 60 percent. The other 40 percent had either obtained a forbearance or were in default.

• Among college graduates who were employed, average annual salaries went down from $39,300 in 2001 to $34,400 in 2009 (measured in 2009 dollars).

To summarize: Over a 13 year period, more Americans were  borrowing to attend college, and they were borrowing more money. At the same time, salaries for college graduates went down and fewer graduates were making payments on their loans one year after graduating.

 Unfortunately, the data analyzed in Ms. Woo's NCES report are old.  She was reporting on the financial situation of people who graduated five years ago. But there is no indication that the financial outlook for college graduates has gotten better in the last five years.  On the contrary, the student-loan default rate has gone up substantially in that time period.

Does this trend have a happy ending? I don't think so. I don't have a sure-fire formula for getting college costs under control or for reducing the amount of money college students need to borrow. Nevertheless, we could brighten this dreary picture if we shut down the for-profit colleges and encouraged low-income students to attend low-cost community colleges and state institutions. And we could ease the burden on overstressed student-loan debtors if we allowed them reasonable access to the bankruptcy courts.

But almost no one is talking about serious reforms in higher education. Instead, we just keep telling ourselves that a college degree is a good investment--no matter what it costs.

References

Jonathan Cowan & Jim Kessler.  "The Middle Class Gets Wise." New York Times, October 20, 2013. Sunday Review Section, p. 4.

Jennie H. Woo. Degrees of Debt: Student Borrowing and Loan Repayment of Bachelor's Degree Recipients 1 Year After Graduating: 1994, 2001, and 2009. Washington, DC: National Center for Education Statistics, October 2013. Accessible at: http://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2014011

Obama Signs a Bill to Reduce Interest Rates on Student Loans: This is Just a Side Show

Earlier this month, Congress passed a bipartisan bill to reduce interest rates on student loans, and President Obama signed the bill into law this week.  Under the new law, the interest rate on this year's undergraduate loans is set at 3.9 percent. For graduate loans, the rate is 5.4 percent. For loans taken out by parents, the new rate is locked in for this year at 6.4 percent.

Interest rates will rise if the interest rate on 10-year treasury notes goes up, which it is expected to do, but the maximum interest rate under the new law is capped at 8.25 percent for undergraduate loans. The cap for graduate student loans is set at 9.5 percent and parents' loans are capped at 10.5 percent.

The new law is good news, I suppose, and nullifies the 6.8 percent interest rate that undergraduates were paying before it was enacted. But make no mistake--the recent Congressional squabble about interest rates on student loans is just a side show. 

Why? Because almost everyone participating in the congressional debate on student-loan interest rates assumed that the borrowers will pay back the money. As I noted in a previous blog, the New York Times and Senator Elizabeth Warren talked as if the government would make an unseemly profit if the interest rate on student loans wasn't lowered.

 

Out of Control

All this is nonsense.  The student loan default rate is so high that the government is going to lose money no matter what interest rate it charges on student loans.  How high is the default rate? No one knows for sure because the Department of Education hasn't released the data.  But DOE itself estimates that 46 percent of students who borrow money to attend for-profit institutions will default on their loans at some point during the repayment period.

And, as everyone knows, DOE has been underestimating student-loan default rates.  So if DOE says 46 percent of students who borrow to attend for-profit colleges are going to default, it is a safe bet that the real default rate for this group is well over 50 percent. 

Furthermore, a lot of former students have gotten economic hardship deferments that temporarily excuse them from making loan payments; and these people aren't counted as defaulters. Nevertheless, a lot of these folks will never pay off their loans. 

As Senator Harkin's Senate Committee report pointed out, people whose loans are in deferments are excused from making loan payments, but the interest on the loans continues to accrue for most borrowers, causing students' overall debt to grow larger with each passing month.  Thus, economic hardship deferments are making it harder for debtors who obtain them to ultimately pay off their loans.

How many people have loans in deferment status? DOE hasn't released the number, but it could be millions.  As the Harkin Report explained, for-profit colleges are aggressively encouraging their former students to apply for economic hardship deferments in order to keep their institutional default rates down.  And these deferments are ridiculously easy to get.  According to the Harkin Committee,  sometimes it is just a matter of a phone call.

No--the federal student loan program is like an out-of-control express train that is headed straight for a cliff.  Congress doesn't care--those guys and gals plan on getting off at the next station. No, it is students--especially students attending for-profit colleges--who are going over the cliff with the train.

References

Josh Lederman and Philip Elliott. Obama Signs Student Loan Deal. MSN Money, August 9, 2013. Accesible at: http://money.msn.com/business-news/article.aspx?feed=AP&date=20130809&id=16792937

Richard Cordray, New Director of Consumer Financial Protection Bureau, is Clueless About the Student Loan Crisis

CFPB's Richard Cordray: Clueless

First, the good news. The nation's Consumer Financial Protection Bureau has a new director--Richard Cordray; and he is worried about the college loan crisis.  Now the bad news. Mr. Cordray is apparently clueless about how to address this problem.

In an interview with USA Today, Mr. Cordray made clear that the CFPB is concerned about young people who have taken on high levels of debt to attend college.  "Their lives are effectively ruined or certainly potentially held back for many years," Cordray told USA Today. According to a CFPB report, many young people have been forced to postpone buying a home, starting a business or having a family by their massive student loans.

So what does Mr. Corday suggest we do about it?  More education! 

That's right, the CFPB is encouraging better financial education for young college students, including the use of its "Know Before You Owe" online financial aid shopping tool. 

Thanks, Richie, for warning people to be more careful when they take out student loans. 

And what is Mr. Cordray's other suggestion for dealing with the student loan crisis? He advises more borrowers to take advantage of the government's extended loan repayment plans.  Instead of paying loans off in ten years, more debtors should pay a percentage of their income toward paying off their loans over a period of 20 or 25 years.  In other words, he has bought into the sharecropper solution to the student loan crisis.  Just pay a portion of your income to the government over a majority of your working life. 

Thanks again, Richie. That's really helpful.

Not surprisingly, the CFPB's advice fits exactly with the higher education industry's stance on the student loan crisis.  This gigantic problem can be fixed, the colleges' trade organizations say, by giving students more information about borrowing money to attend college and then encouraging students to enroll in long-term income-based repayment plans to pay off their debt.

This stance relieves colleges and universities from reining in their costs, and it relieves the government from any responsibility for effectively regulating the for-profit college sector, where student-loan abuses are most prevalent.

Frankly, this country doesn't need a Consumer Financial Protection Bureau if it is just going to perpetuate the status quo and parrot the stance of the rapacious higher education industry.  If the CFPB is going to effectively address the student loan crisis, it should do these things:

1) Insist that the Department of Education accurately report the student loan default rate--the percentage of people who default over the life of the loan repayment period.  It should also insist on an accurate accounting of the people who are not making loan repayments because they obtained financial hardship deferments.

2) Advocate for amending the Bankruptcy Code to allow distressed student loan debtors to discharge their loans in bankruptcy under the same terms available for discharging other nonsecured debt.

3) Insist on legislation to stop the government from garnishing Social Security checks of elderly student-loan debtors who defaulted on their loans.

And of course there are a host of other things the CFPB can do to address the student-loan crisis besides service a "Know Before You Owe" project. 

But perhaps I'm being unfair to the CFPB. After all, it also operates a complaint department.  If you have a complaint about your student loans,  just call the CFPB's 800 number: 1-800-TUF-LUCK. 

References

Consumer Financial Protection Bureau. Know Before You Owe: Student Loan Project. Accessible at: http://www.consumerfinance.gov/students/knowbeforeyouowe/

Jayne O'Donnell. Consumer protection chief talks student loans. USA Today, August 5, 2013, p. 3B.

Young People Hopelessly Mired in Heavy Student Loan Debt: It’s Not Their Fault

Jennifer Silva wrote an excellent essay for the Sunday Times about the alienation and isolation of working-class young people “who are trying to figure out what it means to be an adult in a world of disappearing jobs, soaring education costs and shrinking social support networks.” Many of these young people are in dead-end jobs and a lot of them have college-loan debts for educational experiences that did not open the door to a middle-class income.

Photo credit: USA Today

As Silva pointed out, the economic hardships these people have suffered is well documented. What society as a whole fails to realize, however, are the so-called “hidden injuries” these young people have endured.  “Increasingly disconnected from institutions of work, family and community, they grow up learning that counting on others will only hurt them in the end,” Silva wrote. Many feel betrayed by the institutions in their lives--“colleges, the health care system, employers or government.”

One of Silva’s observations struck me as particularly poignant--the fact that many young people who have failed to achieve economic self-sufficiency blame themselves. “[T]hese young men and women don’t want your pity--and they don’t expect a handout,” Silva wrote. “They are quick to blame themselves for the milestones they have not yet (and may never) achieve.”

This tendency for young people to blame themselves for their economic misfortunes seems particularly prominent among young people who borrowed money to attend college and were then unable to pay off their loans. “It was my fault,” many of them say, “that I borrowed too much money, chose the wrong major, or dropped out of college without finishing.”

This tendency toward self blame was illustrated in a New York Times story about Cortney Munna, a woman who took out nearly $100,000 in loans to obtain an interdisciplinary degree in religious and women’s studies at New York University. At the time the article was published, Cortney had been out of college nearly five years and was making $22 an hour.

As the New York Times author put it, Cortney longed for a do-over of the previous decade of her life. “I don’t want to spend the rest of my life slaving away to pay for an education I got for four years and would happily give back,” she said. “It feels wrong to me.”

Later, Cortney apparently regretted that statement--taking full responsibility for her predicament. In an essay published in the Times, this is what Cortney said:

First and foremost, I openly acknowledge my responsibility for my current situation, as well as the naïveté in my estimation of the return on investment of a “high quality” education and a liberal arts degree. My only explanation is that once I was in school, I didn’t think much about tuition beyond filling out the paperwork, and I did what I always had done: focused on my education. 

I accept that this was negligent on my part, but unfortunately, I was too young to know better. I also willingly admit that I am responsible for repaying the money I borrowed. I have been doing this, to the best of my ability, over the course of the last five years and have every intention of continuing to do so. The one part of this process that I regret is being quoted as saying I would happily give back my degree. That’s an emotionally charged statement that only comes out during moments of my most intense frustration.

Personally, I am sorry Cortney recanted her original statement about happily giving back her degree.  That statement--in my opinion--accurately implied that part of the blame for her predicament should be attributed to other parties--including Citibank, who loaned her $40,000 after she was already heavily indebted. As the Times writer observed, “[W]hat was Citi thinking, handing over $40,000 to an undergraduate who had already amassed debt well into the five figures?”

Unfortunately, I think many former college students who are hopelessly indebted by their student loans are like Cortney--they primarily blame themselves. And that attitude has allowed the status quo to continue to the benefit of the wrong parties, including the banks, the universities, and overpaid university executives.

I was heartened for awhile by the Occupy Wall Street movement, hoping that this protest movement might take fire and ignite change.  But the Occupy protesters were put down in short order by brutal police tactics.  At UC Davis, for example, campus police officers assaulted the Occupy protesters with pepper spray.

Returning to the recent essay by Jennifer Silva, this is the point I wish to make. Silva is right that many young people who were badly treated by the new economy and by higher education are blaming themselves for their predicament. In my opinion, these people are victims who should be assigning a majority of the blame to other parties.

It is true that the federal student loan program has helped millions of young people obtain a college education.  But it has also ruined the lives millions more.

Currently, Americans are burdened by more than a trillion dollars in student-loan indebtedness.  Congress refuses to amend the bankruptcy laws to provide relief for the people who deserve relief.  It refuses to rein in the for-profit universities, which have the highest student-loan default rates. Universities--both public and private--have feasted off the student loan program, and their executives are making obscene amounts of money.  Private banks have their noses at the trough, recklessly loaning money to students at high interest rates.

In short--a lot of parties are at fault for our current predicament. Personally, I hope overstressed student-loan debtors stop blaming themselves and get angry at the people who created this mess.

References

Ron Lieber. (2010, May 28). Placing the Blame as Students Are Buried in Debt. New York Times. Accessible at: http://www.nytimes.com/2010/05/29/your-money/student-loans/29money.html?pagewanted=all

Cortney Munna. (2010, June 1). More on Cortney Munna’s Student Loan Tale. New York Times. Accessible at: http://bucks.blogs.nytimes.com/2010/06/01/more-on-cortney-munnas-student-loan-saga/

Jennifer Silva. Young and Isolated. New York Times, Sunday Review Section, p. 7.