Suicide and Student Loans: Is There a Link?

Death rates among white, middle-aged Americans have gone up significantly in recent years. According Anne Case and Angus Deaton, two Princeton economists, death rates for people in the 45 to 54 age group began rising in 1999. For middle-aged white people with a high school diploma or less, the mortality rate rose 22 percent between 1999 and 2013.

Why are relatively young white Americans dying at a higher rate than they did 15 years ago? Case and Deaton say most of the rising mortality rate can be attributed to suicide or deaths related to alcohol or drug abuse.People in this age group are experiencing a lot of stress, including economic stress; and they are turning to alcohol and drugs to deal with it. “What we see here is a group that’s in quite a lot of distress,” said Ms. Case in a Wall Street Journal interview.

As Case and Deaton said in their report:

Although the epidemic of pain, suicide, and drug overdoses preceded the financial crisis, ties to economic insecurity are possible. After the productivity slowdown in the early 1970s, and with widening income inequality, many of the baby-boom generation are the first to find, in midlife, that they will not be better off than were their parents. Growth in real median earnings has been slow for this group, especially those with only a high school education. 

As everyone knows, Americans' accumulated student-loan debt has been going up steadily for the past 20 years. Could there be a  link between student-loan debt and rising mortality rates among middle-aged white Americans?

Deaton and Case did not examine student-loan indebtedness in their study, and any attempt to link student loans to rising death rates would be speculative. Moreover, Case and Deaton found that middle-aged people with college degrees had not experienced higher mortality rates.

Nevertheless, suicide rates for the Baby Boomer generation have gone up dramatically in recent years. According to a report by Katherine Hempstead and Julie Phillips, the suicide rate  for people in the 40-64 age group has gone up 40 percent since 2007.

Hempstead and Philips suggest that economic problems may have contributed to the rising suicide rate among Baby Boomers, and that "adverse effects of economic difficulties on psychological well-being may have been greater for those who did not anticipate them; this may well have been the case for those who were educated and wealthier . . . ."

One thing is certain: Our federal government has constructed a student-loan scheme so heartless that it almost seems to have been designed to plunge millions of Americans into long-term clinical depression.  So isn't it reasonable to conclude there is a connection between crushing student loans and rising suicide rates among middle-aged people?

Let's examine some of the evidence pointing to growing stress among student-loan debtors:

• As the New York Times recently pointed out, ten million people are in default on their student loans or delinquent on their loan payments.

• According to a recent report by the Brookings Institution, loan balances for a significant number of student-loan debtors actually went up after they entered the repayment phase  of their loans. Why? Because a lot of people have obtained economic-hardship deferments that exempt them from making loan payments due to dire economic circumstances.  But because they are not paying down accruing interest, their loan balances are getting larger, making them more difficult to pay off.

• The percentage of elderly Americans with unpaid student-loan debt is going up. According to a report from the General Accounting Office, the percentage of people in the 65 through 74 age group with outstanding student loans grew from 1 percent in 2004 to 4 percent in 2010, a four-fold increase   And the amount of student-loan debt owed by elderly people is growing as well.  In fact, the amount of debt held by elderly Americans grew six fold between 2005 and 2013--from $2.8 billion in 2005 to $18.2 billion.

• The federal government is  garnishing more and more Social Security checks to collect on unpaid student loans.   In 2002, only 31,000 people had Social Security benefits garnished because they had defaulted on their student loans. That number ballooned five fold in just 11 years. In 2013, 155,000 Americans saw their Social Security checks reduced due to unpaid student-loans.

Let's consider that last bullet from a more personal perspective. According to a story posed on Market Watch, the U.S. government is garnishing the Social Security checks of Naomia Davis, an 80 year old woman who is suffering from advanced Alzheimer's Disease. Ms. Davis's only income is her $894 Social Security check, and the feds take $134 of it to pay down on an old student loan.

In short, it is reasonable to conclude that crushing student-loan debt contributes to depression and even suicide among Baby Boomers who are struggling to pay off college loans they took out when they were young.  The student loan crisis is not only eroding Americans' sense of economic well being; it may be literally killing them.

References

Jillian Berman. When your Social Security check disappears because of an old student loan. MarketWatch, June 25, 2015.  Accessible at: http://www.marketwatch.com/story/when-your-social-security-check-disappears-because-of-an-old-student-loan-2015-06-25

Anne  Case and Angus Deaton. Rising morbidity and mortality in midlife among white
non-Hispanic Americans in the 21st century.  Accessible at: http://www.pnas.org/content/early/2015/10/29/1518393112.full.pdf

Editorial. Death Among MiddleAged Whites. New York Times, November 5, 2015.

Editorial. Why Student Debtors Go Unrescued. New York Times, October 7, 2015. Accessible at: http://www.nytimes.com/2015/10/07/opinion/why-student-debtors-go-unrescued.html?_r=0

General Accounting Office. Older Americans: Inability to Repay Student Loans May Affect Financial Security of a Small Percentage of Borrowers. GAO-14-866T. Washington, DC: General Accounting Office. http://www.gao.gov/products/GAO-14-866T

Katherine A. Hempstead and Julie A. Phillips. Rising Suicide Among Adults Aged
40–64 Years: The Role of Job and Financial Circumstances.  American Journal of Preventive Medicine 84(5):491-500 (2015). Accessible at: http://www.ajpmonline.org/article/S0749-3797(14)00662-X/pdf

Jason Iuliano. An Empirical Assessment of Student Loan Discharge and the Undue Hardship Standard. American Bankruptcy Law Journal 86 (2012), 495.

Gina Kolata. Deaths Rates Rising Middle-Aged White Americans, Study Finds. NewYork Times, November 3, 2015. Accessibe at: http://www.nytimes.com/2015/11/03/health/death-rates-rising-for-middle-aged-white-americans-study-finds.html

Betsy McKay. The Death Rate Is Rising for Midle-Aged Whites. Wall Street Journal, November 3, 2015. Accessible at: http://www.wsj.com/articles/the-death-rate-is-rising-for-middle-aged-whites-1446499495

If you have to enroll in a 25-year income-based repayment plan to pay for your college education, you attended the wrong college

In his 2012 book entitled Don't Go To Law School Unless), Paul Campos made a statement that startled me by its intense clarity. "The truth is," Campos wrote, "that people who are likely to end up in [income-based repayment plans] if they go to law school should not go at all" (48). 

And of course Campos is right. But isn't the same observation true about undergraduate education as well? A person who must enter a 25 year income-based repayment plan to pay for a college degree either enrolled in the wrong college or chose the wrong academic major--and probably both.

For example, Ron Lieber of the New York Times wrote a story about five years ago that featured Cortney Munna, who borrowed almost $100,000 to get a degree in women's studies and religious studies at New York University, one of the most expensive universities in the world.. At the time of Lieber's story, Munna was working for a photographer for $22 an hour and enrolled in night school in order to defer her loan payments. 

As Lieber pointed out, going back to college simply to postpone student-loan payments on the degree one already has is not a good long-term option because interest continues to accrue on the debt.

I wonder how Ms. Munna is doing today. I think the chances are very good that she is in a 25-year income-based repayment plan

Campos said in his book that "there's a good argument to be made that law schools [that] promote IBR[income-based repayment plans] are participating in  a fraud on the public." (50) Again, I think Campos is right.

 Most people who enter into 25-year income-based repayment plans won't make payments large enough to cover accruing interest and also pay down the principal on their loans. In other words, most people in IBRs will see their loans negatively amortize. This means the taxpayer will be left holding the bag when the loan-repayment term ends and the unpaid portion of the loan is forgiven.

To return to Ms. Munna's story, shouldn't NYU bear some responsibility for allowing her to borrow so much money for a degree that is not likely to lead to a job that will allow her to pay back the debt?

Of course, universities are not in the habit of admitting that some of their degree programs are overpriced. But maybe it is a habit they should acquire.  How many private universities could look their students in the eye and say their degrees in women's studies, religious studies, sociology, urban studies etc. etc. etc. are worth going $100,00 into debt? Not many.

References

Paul Campos. Don't Go To Law School (Unless). Self-published, 2012.

Ron Lieber. Placing the Blame as Students Are Buried in Debt. New York Times, May28, 2010. Accessible at http://www.nytimes.com/2010/05/29/your-money/student-loans/29money.html

American Law Schools Have Embraced Greed And Have Become Poor Models for the Ethical Practice of Law

Many years ago when I was a practicing lawyer, my senior law partner made an observation I never forgot. Law graduates become the kind of attorney they will always be, he remarked, based on their first law job.

And based on my experience, my law partner's assessment is 100 percent accurate. Young people who graduate from law school and begin working for an ethical law firm are molded into ethical lawyers and remain ethical lawyers all their lives. Fledgling attorneys who join firms with sloppy ethics or an undue focus on making money become ethically sloppy themselves, and the slipshod ethical standards of their first employer shape their entire careers.

But of course attorneys' ethical values are being shaped even before they take their first law jobs. Law students first begin developing their ethical standards while in law school. In their classroom interactions and their examinations, they learn the value of honesty and fair dealing.

And if this is true, then it is important for law students to attend law schools that model the highest ethical standards. For if law students see their law schools make decisions based on greed and self-promotion, it seems likely that the students themselves will adopt similar attitudes about the legal  profession.

And this brings me to an editorial in today's Sunday Times entitled "The Law School Debt Crisis." In 2012, the Times reported, the average law graduate accumulated $140,000 in debt; and yet newly minted attorneys are entering a job market in which 43 percent of them cannot find long-term, full time jobs in the legal field.

Simply put, the market for lawyers is flooded. Many sensible young people have analyzed their job prospects if they go to law school and have decided to choose other professions. In fact, as Steven J. Harper reported in a New Times op ed essay a few months ago, law-school enrollment has slipped from 52,000 in 2010 to 38,000 last year.

But the drop in law-school enrollments has not kept pace with the slump in demand for lawyers. Most law schools depend on tuition money for the vast majority of their income; they simply must attract students to maintain their revenue streams. Consequently, they have lowered admissions standards to keep heir enrollments up. In 2014, the Times pointed out, test scores on the common portion of the LSAT were the lowest they have been in 25 years.

In sum, this is the state of the legal field. Law schools all over the United States hiked their tuition in response to a change in federal law that allowed students to borrow the full amount of their graduate education. And law schools also admitted more students to boost revenues. When the market for lawyers crashed, law schools did not reduce their fees or cut their enrollments sufficiently. The result, to use the Times' language, is a "death spiral" in the legal job market with unemployed or under-employed attorneys carrying mountains of student-load debt that they can't pay off.

Ironically, the glut in lawyers is occurring at the same time distressed student-loan debtors are filing for bankruptcy without the aid of  attorneys. When these overburdened student-loan borrowers file adversary proceedings to discharge their student loans through bankruptcy, they are opposed by loan collection companies that have plenty of high-paid legal talent.

How can this disaster be turned around? The Times recommends expanding the Obama administration's so-called gainful employment rules that tie an institution's eligibility for federal student-aid money to its success in preparing graduates for good jobs. Currently the rule only applies to for-profit law schools, but the Times urges the rule be amended to cover nonprofit law schools as well.

The Times also thinks a cap should be placed on the amount of federal student loans a student can obtain. A cap in federal loan money, the Times believes, would drive tuition down.

 I support both these ideas, but I would go further. I would shut off federal student-aid money to all for-profit schools, including for-profit law schools, which charge extraordinarily high tuition and have lousy records for placing their graduates in good jobs that require law degrees.

For the American people, the stakes are high. Our society is based on the rule of law, and our law schools must produce graduates who are intelligent and have the highest ethical standards. But American law schools have set a poor ethical example for their students. They have bloated their student rolls and raised their tuition for the sole purpose of sucking up student-loan money and enhancing their revenues.

Our justice system will break down completely if our nation's lawyers adopt the ethical standards of the law schools they attended and begin thinking of their profession solely as a way to get rich.

References

Editorial. The Law School Debt Crisis. New York Times, October 25, 2015. Accessible at: http://www.nytimes.com/2015/10/25/opinion/sunday/the-law-school-debt-crisis.html

Steven J. Harper. Too Many Law Students, Too Few Legal Jobs. New York Times, August 25, 2015.  Accessible at: http://www.nytimes.com/2015/08/25/opinion/too-many-law-students-too-few-legal-jobs.html

Elizabeth Olsen. Burdened With Debt, Law School Graduates Struggle In Job Market. New York Times, April 26, 2015. Accessible at: http://www.nytimes.com/2015/04/27/business/dealbook/burdened-with-debt-law-school-graduates-struggle-in-job-market.html

 

All Student Loan Debtors Should Read Natalie Kitroeff's Recent Online Article in BloombergBusiness.Com

Every distressed student-loan debtor should read Natalie Kitroeff's recent article in BloombergBusiness.com about Murphy v. U.S. Department of Education and Educational Credit Management Corporation, now pending before the First Circuit Court of Appeals.  And any student-loan debtor who is trying to discharge a student loan in bankruptcy should read the amicus brief filed in that case by the National Consumer Law Center and the National Association of Consumer Bankruptcy Attorneys.

The essence of the Murphy case can be summarized in a few words. Robert Murphy took out federal PLUS loans (student loans taken out by parents to pay their children's college costs), but he lost his job as the president of a manufacturing firm.  He's been unemployed for 13 years--too old, he says, to find comparable employment and overqualified for lower-paying jobs in his field.

Today, Murphy is 65 years old, and his total student-loan indebtedness has grown to almost a quarter of a million dollars due to accumulated interest. He and his wife are living on an income of $15,000 a year, which his wife earns working as a teachers aide.

Murphy filed for bankruptcy, seeking relief from his PLUS loans, but a bankruptcy court refused to discharge the debt. Like so many debtors who try to shed their student loans in bankruptcy, Murphy is acting as his own attorney.  His case is now on appeal before the First Circuit.

Murphy hopes to persuade the First Circuit to abandon the harsh Brunner test for determining when it would be an "undue hardship" for insolvent debtors to be forced to repay their student loans. That test requires debtors to show that they cannot repay their student loans and maintain a minimal standard of living, that their financial circumstances aren't likely to change soon, and that they made good faith efforts to repay their loans.

In the Ninth Circuit BAP Court's Roth decision, Judge Pappas filed a concurring opinion arguing that the Brunner test no longer makes sense. He pointed out that the Brunner test was devised at a time when student-loan debtors could discharge their student loans without restriction after a relatively short period of time--after five or seven years.

Today, Judge Pappas explained, student-loan debtors hold a trillion dollars in outstanding student-loan debt. And Congress amended the Bankruptcy Code so that insolvent debtors must prove "undue hardship" no matter when they file for bankruptcy, even if it is decades after the loans were taken out.

John Rao, attorney for the National Consumer Law Center, filed a brilliant amicus brief in support of Murphy, arguing that the Brunner test should be overturned. Rafael Pardo, a nationally renowned legal scholar from Emory Law School, also filed an amicus brief in support of Murphy's position.

If the First Circuit rules in Murphy's favor, bankruptcy might become a viable option for millions of distressed student-loan debtors. And if that happens, the world will turn upside down for the federal government, the federal student-loan program, and the colleges and universities that have feasted off of student-aid money without regard to whether their students could pay off their student loans.

Kitroeff's article pointed out that total outstanding indebtedness has doubled in just seven years. At the current rate of growth, total indebtedness will double again within 10 years, ballooning to well over two trillion dollars.

Let's all say a prayer for Robert Murphy and the two amicus attorneys who came to his aid: John Rao and Rafael Pardo. Ten million people are now delinquent on their student loans or are in default, and nine million more hold deferments or forbearances that temporarily excuse them from making payments.  Almost 4 million people are making payments under income-based repayment plans, which means total indebtedess for most of them is going up, not down, because their loan payments don't cover accruing interest.

This situation can't go on forever, and Robert Murphy may be the guy that ushers in relief for millions of fellow sufferers.  If you are a student-loan debtor in bankruptcy, you must read the amicus briefs in the Murphy case and get the arguments made in those briefs before your bankruptcy judge. Mr. Murphy, Mr. Rao, and Mr. Pardo are on the side of the angels, and I think their arguments will be persuasive to many bankruptcy judges around the United States regardless of what the First Circuit does.

References

Amicus Brief filed by National Consumer Law Center and National Association of Consumer Bankruptcy Attorneys in Support of Appellant (Robert Murphy) in Murphy v. U.S. Department of Education & Educational Credit Management Corporation. (Written by John Rao, esq.) Accessible at: https://www.nclc.org/images/pdf/bankruptcy/brief-murphy-1st-cir-amicus.pdf

Amicus Brief filed by Rafael Pardo, arguing for reversal of District Court's decision in Murphy v. U.S. Department of education and Educational Credit Management Corporation. Accessible at: http://www.businessweek.com/pdfs/murphy-pardo-brief.pdf

Natalie Kitroeff. This Court Case Could Unshackle Americans From Student Debt. BloombergBusiness.com, October 8, 2015. Accessible at:  http://www.bloomberg.com/news/articles/2015-10-08/this-court-case-could-unshackle-americans-from-student-debt

A Brookings Institution Blogger Asks a Very Good Question: "How well do default rates reflect student loan repayment?"

Robert Kelchen, posted a blog essay on the Brookings Institution's "Brown Center Chalkboard" that asks a very good question: "How well do default rates reflect student loan repayment?'

Kelchen pointed out that "just over half" of the $623 billion in Direct Loans made to students who have entered repayment are  current on their loan payments. Borrowers  with approximately $111 billion in student-loan debt are delinquent or in default.  And borrowers owing another $180 billion are in deferment or forbearance.  In other words, borrowers holding about 46 percent of outstanding Direct Loans aren't making payments.

People whose loans are  in deferment or forbearance aren't counted as defaulters.  But interest is accruing for most of these people, which means their loan balances are getting larger and more difficult to repay.

Kelchen makes several important points in his blog essay, but the most important point is this: "Cohort rates substantially underestimate the percent of students who have been unable to lower their loan balances." And here's the money quote:

Of the nearly 5,700 colleges with data on both [cohort default rates] and repayment rates, the median college had a 14.9 percent three-year [cohort default rate] while 40.8 percent of students did not repay any principal in the first three years after leaving college.  This means that one in four exiting students was not in default, yet did not make a dent in their loan balance in the first three years after entering repayment.

What does this mean?   First of all, a three-year default rate of nearly 15 percent is alarming in itself. But the fact that a quarter of non-defaulting student-loan borrowers did not reduce their loan balances by even a dollar three years after beginning the repayment phase is truly frightening. Those people are not counted as defaulters as long as they retain their  forbearance or deferment status,but their loan balances are getting bigger with each passing month. In short, a lot of people who are currently excused from making loan payments will never pay off their student loans.

When we reflect on the implications of Kelchen's essay along with an earlier Brookings Institution report showing that nearly half of people who attended for-profit colleges default within five years of beginning repayment, we get some sense of the magnitude of the student-loan crisis.

It's time for the Department of Education, Congress and the American public to face this fact: student-loan forbearance options, loan deferment options, and long-term income-based repayment plans are all ways to hide from reality, which is this: millions and millions of people are holding billions of dollars in student-loan debt, which they can't pay off.

And since the Bankruptcy Code makes loan forgiveness so onerous, millions of suffering people will be burdened with this debt for the rest of their lives.

Let's face it, 21st century America is not much different from 18th century England.  Our country doesn't put debtors in prison or deport them to Australia; it just lets them dangle on the outskirts of the American economy until the day they die.

References

Robert Kelchen. How well do default rates reflect student loan repayment? Brookings Institution, The Brown Center Chalkboard, September 30, 2015. Accessible at: http://www.brookings.edu/blogs/brown-center-chalkboard/posts/2015/09/30-default-rates-student-loan-kelchen

You can't win if you don't play: More people should attempt to discharge their student loans in bankruptcy

It's a mess, folks. Seven million people are currently in default on their student loans. Millions more have stopped making payments but aren't counted as defaulters because they obtained economic-hardship deferments, which are given out like candy.  Almost 4 million people are making payments under income-based repayment plans that can last as long as 25 years. Twenty-five years!

Why don't some of these overburdened student-loan debtors file for bankruptcy?  I'll tell you why. Most people believe it is impossible to obtain relief from their student loans in the bankruptcy courts.

But that's not true. Three years ago, Jason Iuliano published an empirical study of student-loan discharges under the Bankruptcy Code's "undue hardship" provision. This is what he found:

• Nearly forty percent of people who attempted to discharge their student loans in the bankruptcy process obtained relief.

• People who attempted to discharge their student loans without an attorney were as successful in obtaining bankruptcy relief as people who hired bankruptcy lawyers.

The problem, according to Iuliano, is not that it is impossible to obtain a discharge of student loans in bankruptcy. THE PROBLEM IS THAT MOST PEOPLE DON'T TRY.

In 2007, Iuliano reported, almost a quarter of a million people with student loans filed for bankruptcy (238,446 to be exact). Of that number, less than 300 even attempted to discharge their student loans in bankruptcy. Apparently they assumed that it would be useless to try.

Iuliano constructed a model for predicting which factors were most important in obtaining a student-loan discharge. He estimated that 69,000  student-loan debtors  who filed for bankruptcy in 2007 were good candidates for discharge if they had only applied for relief.

In other words, based on Iuliano's research, more insolvent student-loan debtors should be seeking to discharge their student loans in bankruptcy because a fair percentage are likely to be successful. But you can't win if you don't play. 

Iuliano's article was published in 2012 based on 2007 bankruptcy data. I think the percentage of successful student-loan discharges would be higher today than it was during the period Iuliano studied. Several recent bankruptcy court decisions show that at least some courts are beginning to view student-loan debtors with more compassion than courts once did.

In the Roth case, for example, the Ninth Circuit's Bankruptcy Appellate Panel rejected a loan creditor's argument that Ms. Roth should be put in a 25-year repayment plan. "The law does not require a party to engage in futile acts," the court said.   Roth was a 68-year old woman with chronic health problems living on a Social Security check of less than $800 a month. It would be futile, not to mention callous, to put her on a 25-year income-based repayment plan.

Of course, the Department of Education and its student-loan debt collectors aggressively oppose student-loan discharge efforts in the vast majority of cases, often filing technical motions that make the  discharge process more expensive than necessary. I think  the creditors file these motions to discourage student-loan debtors who file adversary actions without the help of a lawyer. 

Of course, hiring a bankruptcy lawyer to fight the Department of Education can be expensive, and people in bankruptcy generally don't have the money to hire lawyers. Nevertheless, a lot more insolvent debtors should be trying to discharge their student loans in bankruptcy, even if they must do so without a lawyer.

And here are my suggestions for giving overburdened but honest student-loan debtors some bankruptcy relief:

1) Legal Aid clinics should get in the business of representing student-loan debtors. Legal aid clinics, including those that are attached to law schools, should have their attorneys become experts in bankruptcy law--especially the evolving law that relates to student loans; and the clinics should start representing student-loan debtors who seek to discharge their student loans in the bankruptcy courts.

2) Public interest organizations should develop free web sites that would provide useful information to people who are seeking to discharge their student-loans in bankruptcy without lawyers. The site should include sample pleadings and sample discovery motions, recent research on student-loan bankruptcies, recent court decisions, and sample briefs that could be used as models for debtors who are fighting the technical motions that DOE and the debt collectors file. 

Can you imagine the impact if 5,000 people tried to discharge their student loans in the bankruptcy courts rather than the mere 300 who tried in 2007? I think these people would find the bankruptcy courts are much more sympathetic than the debtors might have expected. More and more frequently, the bankruptcy judges are reviewing the details of these pathetic cases and seeing people who borrowed money in good faith to attend college and simply never made enough money to pay it back. Divorce, illness, unemployment, poor choices in deciding on a major, unscrupulous for-profit colleges--all kinds of unexpected things happened to people who simply wanted to get the training they needed to obtain better jobs so they could support their families and have better lives.

As I have said, the bankruptcy courts are becoming more and more sympathetic to these people.  But distressed student-loan debtors have got to ask for bankruptcy relief in order to get it.

References

Jason Iuliano. An Empirical Assessment of Student Loan Discharge and the Undue Hardship Standard. American Bankruptcy Law Journal 86 (2012), 495. 

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

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).