Rising Student-Loan Default Rates and Ridiculously High Tuition Costs: The Big Short

We live in an era of fraud in America. Not just in banking, but in government, education, religion, food, even baseball... What bothers me isn't that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did

Mark Baum (played by Steve Carell)

The Big Short 

The Big Short, the Academy-Award winning movie on the home-mortgage crisis of 2008, shows movie goers how greedy banking institutions created a housing bubble that burst in a shower of home foreclosures and trillions of dollars in financial losses.

A similar bubble has emerged in the federal student-loan program. And although the housing bubble is more complicated than the student-loan bubble, there are some eerie similarities between the collapse of the housing market a few years ago and the student-loan crisis. For example:

Hiding risk. The Big Short includes a scene in which  Mark Baum, a skeptical investment banker played by Steve Carell, quizzes a representative of one the bond rating agencies--Moody's or Standard & Poor. The rating-agency representative admits that  the agency gives mortgage-backed securities  the highest rating--AAA--even  though the agency knows that many of the instruments are packed with risky home mortgages that are headed for foreclosure.

Something similar is happening in the federal student-loan program. Although the Department of Education recently announced that student-loan default rates went down last year--especially in the for-profit sector, that's not really true.  The for-profits have been aggressively signing up their former students in economic-hardship deferment programs that excuse borrowers from making loan payments without being counted as defaulters.

When we look at the five-year default rates in the for-profit sector, the numbers are scary. Almost half the people who took out student loans to attend a for-profit institution default within 5 years of beginning the repayment phase on their loans. And two years after beginning the repayment phase, 3 out of 4 of these students are seeing their loan balances go up--not down--due to accruing interest that is not being paid down.

In short, about half the people who take out student loans to attend for-profit colleges don't pay back their loans. Clearly, this sector of the student-loan program is a train wreck.

Unsustainable rising costs.  As many people still remember, the cost of housing went up rapidly during the early 2000s, with people buying homes and flipping them for huge profits over a matter of months or even weeks. Everybody was making money in real estate--until the housing market collapsed.

Similarly, America has seen college tuition costs rise faster than the inflation rate for many years. The cost of attending law school, obtaining an MBA, or studying at an elite private college has gone through the roof.  I graduated from University of Texas Law School in 1980 and only paid $1,000 a year in tuition. If I enrolled at UT Law School today, it would cost me 36 times as much--$36,000 a year for Texas residents!

Of course, these tuition hikes can't be justified any more than the dizzying cost of a split-level home in Coral Gables, Florida in 2005.  And of course, those costs must eventually come down.  Already, law school enrollments have plummeted and the schools have lowered admissions standards to attract students.  And the elite private colleges are now giving huge discounts on their posted tuition rates; the average freshman now pays about half the college's sticker price.

Hidden costs and fees. Finally, the home mortgage bubble was fueled by greed and fraud. The bankers who packaged mortgage-backed securities were not taking any risks--they took their fees from the transaction costs.  The banking industry was selling toxic financial instruments to gullible investors, including pension funds and people invested in mutual funds.

Similarly, the college industry is charging a gullible public more than a liberal arts degree is worth, and the suckers enroll because, hey, going to Barnard or Brown or Amherst must be a good investment. And the colleges aren't assuming any risks. Their pliant students are borrowing from the federal student loan program, and the government guarantees the loan. Ivy League U doesn't care if its graduates default on their loans any more than Goldman Sachs cared what happened to the investors who bought their mortgage-backed securities.

And the fees! People who default on their loans get assessed huge collection fees and penalties. People are routinely going into the bankruptcy courts trying to discharge student-loan debt that is two or even three times the amount they borrowed due to accrued interest, penalties, and fees.

So if you haven't seen the Big Short, go see it. And as you watch this riveting drama, think about the student-loan program. A bubble is about to burst at a college near you.

"I thought we were better than this."

Student Loan Debtors and the Presidential Race: Hillary still has an opportunity to win over young voteers

Hillary Clinton devastated Bernie Sanders in the South Carolina Democratic Primary election. As Bernie candidly admitted, the Sanders team was "decimated." The only good news, he said, was this: Bernie beat Hillary among voters age 29 and younger.

Hillary talks herself hoarse telling voters how much she has done for them and much more she will do if she is elected President. But young people don't buy it. Essentially, they see her as an elderly political hack who sucks up to the banks.

But Hillary can still make headway with young voters if she would only promise some tangible and substantive reforms to the student-loan program. After all, there are 43 million Americans with outstanding student-loan debt; and most of them are young.

What could she promise? How about this:

1) "If elected president, I will instruct the IRS to draft regulations specifying that forgiven student-loan debt is not taxable."  

Under current law, about 4 million people are in income-based repayment plans, and most of them are seeing their total debt grow larger with each passing month due to accruing interest. When they complete their long-term repayment plans (after 20 or 25 years), their loan balances will be forgiven, but the forgiven amount will considered taxable income by the IRS. This is a real problem for people in income-based repayment plans. Why not just fix that problem with an IRS regulation?

2) "If elected president, my Department of Education will enact regulations that will cut off federal funding to any for-profit college that forces students to sign a promise not to sue the college for fraud or misrepresentation. And I will instruct the Department of Justice to cooperate with State Attorney Generals who are investigating and suing for-profit colleges that exploit students."

This promise demonstrates nothing more than common decency and would be well received by young people.

3) "When I am your president, the government will stop garnishing Social Security checks of elderly student-loan defaulters. And my administration will not oppose bankruptcy relief for elderly student-loan defaulters who are living below the poverty level."

There is nothing radical about this proposition. In fact, last month, in Precht v. U.S. Department of Education, DOE agreed to bankruptcy discharge of an elderly person's student-loan debt and stopped garnishing his Social Security check.

4) "My administration will renegotiate all contracts with student-loan debt collectors like Educational Credit Management Corporation. All these entities will be required to disclose the salaries of their executives and employees. They will also be required to disclose their profits. And I will eliminate the penalties and fees that the collection agencies have been charging distressed student-loan borrowers."

The beauty of these promises is this. All the reforms I listed could be implemented by President Hillary Clinton on the day she takes office. None of them require congressional approval.  And even if they did require statutory changes, what federal legislator would say no to these modest reforms if President Hillary asked for them?

If Hillary made these promises, she would demonstrate that she understands the magnitude of the student-loan crisis and that she  plans to take energetic action to grant some relief.  But my prediction is this: Hillary won't promise any substantive reforms of the student loan program because Goldman Sachs and the banks would disapprove. And that--in a nutshell--is why young people are not voting for Hillary.

References

Natalie Kitroeff. Loan Monitor is Accused of Ruthless Tactics on Student Debt. New York Times, January 1. 2014. Accessible at http://www.nytimes.com/2014/01/02/us/loan-monitor-is-accused-of-ruthless-tactics-on-student-debt.html?_r=0

Stephen Burd. Signing Away Rights. Inside Higher Ed, December 17, 2013. Available at https://www.insidehighered.com/views/2013/12/17/essay-questions-mandatory-arbitration-clauses-students-profit-higher-education

Ashley A. Smith. U.S. Urged to Deny Aid to For-Profits That Force Arbitration. Inside Higher Ed, February 24, 2016. Available at: https://www.insidehighered.com/quicktakes/2016/02/24/us-urged-deny-aid-profits-force-arbitration?utm_source=Inside+Higher+Ed&utm_campaign=183bc9e3a3-DNU20160224&utm_medium=email&utm_term=0_1fcbc04421-183bc9e3a3-198565653

The Nightingale case: Elderly student-loan debtors need a swifter process for bankruptcy relief

Nightingale v. North Carolina State Education Assistance Authority, decided last month. demonstrates how difficult it is for distressed student-loan debtors to obtain bankruptcy relief--even if they are elderly and in poor health.

The Nightingale case: A 67-year-old retired teacher with chronic health problems seeks to discharge her student loans in bankruptcy

Alice Nightingale took out about $48,000 in student loans when she was in her late 50s to obtain a master's degree that would allow her to obtain a job as a public school teacher. Due to serious health issues, she went on disability leave in 2012 and received monthly disability benefits until she retired in  June  of 2014. After retiring, she lived on an income of $1,645 a month, consisting of Social Security income and state retirement benefits.

In June 2013, Nightingale filed for bankruptcy and received a discharge. She then filed an adversary complaint in the bankruptcy court to discharge her student loans.  North Carolina State Education Assistance Authority (NCSEAA), Nightingale's student-loan creditor, filed for summary judgment in 2014, arguing she was eligible for a long-term income-based repayment plan that would obligate her to pay zero on her student loans. Since paying nothing would not be an undue hardship on her, NCSEAA maintained, Nightingale was not entitled to a bankruptcy discharge.

Fortunately for Nightingale, Judge Benjamin A. Kahn, a North Carolina bankruptcy judge, denied NCSEAA's motion, pointing out that the creditor's reasoning would mean that the people who are most worthy of bankruptcy relief could never get it. Furthermore, the judge pointed out,"Participation in such a 'repayment' program in which [Nightingale's]  monthly payment is zero is not repayment at all; rather, the loan continues to accrue interest on the principal without any repayment. At the end of the twenty-five year period, [Nightingale's] loans may be forgiven, but that amount, on which interest has been accruing, may become taxable as income."

The case then went to trial, and Judge Kahn entered his decision on January 16, 2016. The judge ruled that Nightingale met two prongs of the three-pronged Brunner test. First, she could not pay back her loans and maintain a minimal standard of living. Indeed, Judge Kahn ruled, "the unrebutted evidence demonstrated that [Nightingale] is currently incapable of making any material payment on the debts while maintaining a minimal standard of living."

Brunner's second prong required Nightingale to show that she had made good faith efforts to pay back her loan.  Judge Kahn ruled that she met this prong as well. Nightingale had paid about $11,000 on he loans and was currently making income-based payments of $133 a month.

To obtain a bankruptcy discharge of her student loan, Nightingale was also required to pass the third-prong of the Brunner test by showing that exceptional circumstances prevented her from paying back her student loans in the future. In other words, she was obligated to show a "certainty of hopelessness" regarding her long-term financial circumstances.

Judge Kahn admitted that Nightingale's testimony supported a finding of exceptional circumstances. "Nightingale is elderly, has no job prospect in the field for which she was educated, lives on a meager budget, relies upon friends and family to provide shelter, and testified that she has additional medical disabilities that prevent her from returning to gainful employment." In fact, NCSEAA agreed that Nightingale's current situation was dire "and that she is barely able to remain healthy and in affordable housing, much less hold down a job."

But Judge Kahn ruled that Nightingale's own testimony about her chronic health problems was insufficient to show long-term financial distress without corroborating evidence. The judge indicated that corroborating evidence in the form of a letter from Nightingale's doctor about her health status would probably be sufficient and gave her 14 days to produce such a letter or other corroborating evidence of her health problems.

What is the significance of the Nightingale decision?

The Nightingale decision is significant for two reasons. First, Judge Benjamin Kahn flatly rejected a student-loan creditor's argument that Nightingale was ineligible for bankruptcy relief because she could enroll in a long-term income-based repayment plan that would require her to pay nothing due to her limited income. Had Judge Kahn adopted NCSEAA's argument, no student-loan debtor would be eligible for bankruptcy relief, at least not in Judge Kahn's court.

Second, the Nightingale decision demonstrates the difficulty distressed student loan debtors have when trying to discharge student loans in bankruptcy. First, Nightingale had to defeat NCSEAA's summary judgment motion, which took months to resolve. Second, she was required to round up corroborating evidence of her chronic health problems.

In many circumstances, it is entirely appropriate for a bankruptcy judge to require a student-loan debtor to provide proof of chronic health issues. As Judge Kahn correctly observed, when health problems are not obvious, corroborating evidence is necessary to avoid the possibility of fabrication and fraud.

But Alice Nightingale is 67 years old! She went on disability leave until she retired in 2014 and now lives on an income of only $1,645 a month. Why was it necessary for her to provide corroborating evidence that chronic health issues prevent her from increasing her income in the future?

I don't mean to be too hard on Judge Kahn. He was obviously sympathetic to Nightingale's situation. After all, he denied NCSEAA's motion for summary judgment, and he gave Nightingale time to provide supporting evidence of her chronic health problems.  I feel sure the judge will ultimately discharge Nightingale's student-loan debt.

Nevertheless, when an elderly person living on a small pension and a Social Security check comes into bankruptcy court to discharge her student loans, I believe she is entitled to a speedy discharge. Unfortunately for Alice Nightingale, her adversary proceeding lasted more than two years. And her case may still not be behind her. If Judge Kahn discharges her student-loan debt, as seems likely, NCSEAA may appeal.

References

Nightingale v. North Carolina State Educ. Assistance Authority, 543 B.R. 538 (Bankr. M.D.N.C. 2016) (ruling requiring Nightingale to provide corroborating evidence of her chronic health problems).

Nightingale v. North Carolina State Educ. Assistance Authority, 529 B.R. 641 (Bankr. M.D.N.C. 2015) (ruling on NCSEAA's motion for summary judgment).

In the Jubilee Year of Mercy, Catholics Should Urge the Government to Forgive Student-Loan Debt

According to Old Testament scripture, a jubilee year occurs every fifty years; and in that year, slaves are freed and debts are forgiven. Leviticus 25:8-13. Pope Francis has proclaimed a Jubilee Year of Mercy for the Catholic Church that begins on December 8, the Feast of the Immaculate Conception. Would not this be a good time for the  U.S. government to forgive  $1.3 trillion in student-loan debt?

Perhaps not all of it. Of the 41 million people who have outstanding student loans, a great many received good value for their college education and can pay back what they borrowed. But 10 million people have either defaulted on their student loans or are delinquent in their payments. Millions more have gotten economic hardship deferments and aren't paying down their loans.

And for some people, their student loan debt is completely out of control. Liz Kelly, for example, featured in a recent New York Times article, is a 48-year old school teacher who owes $410,000 in student-loan debt--most of it accumulated interest. Will she ever pay it back? Not likely.

A 2014 law review article reported that 241,000 people with student-loan debt filed for bankruptcy in 2007, but less than 300 of them even tried to discharge their student loans. Either they figured it would be hopeless to try wipe out their student-loan debt in the bankruptcy courts or they didn't have the money to hire a lawyer to assist them.

And yet, as Paul Campos explained on his blog site and in a recent book,  we have thousands of unemployed or underemployed attorneys, many of whom have crushing student-loan debt themselves. Why doesn't the government, as an act of mercy, encourage these idle lawyers to help people discharge their student loans in bankruptcy?

Mercy, Pope Francis reminds us demands justice. "True mercy, the mercy God gives to us and teaches us, demands justice, it demands that the poor find a way to be poor no longer," Pope Francis explained. Mercy demands that institutions strive to make sure that "no one ever again stands in need of a soup-kitchen, of makeshift lodgings, of a service of legal assistance in order to have his legitimate right recognized to live and to work, to be fully a person."

Our country now has 23 million people who are unable to pay off their student-loan debt.  Indeed, about 150,000 elderly people are having their Social Security checks garnished by the federal government to offset unpaid student loans. For these people there is no Jubilee Year of Mercy--no forgiveness, and little relief even in the bankruptcy courts.

We are now a secular people--a people who pride themselves on having driven religion out of the schools and the public square. But surely we are not a heartless people. Surely our hearts are susceptible to warming by the words of a great man like Pope Francis.

So let us do mercy in the Jubilee Year of Mercy. And if our government is incapable of mercy, let us look for ways we as individuals can render mercy and to work for a system of higher education that does not drive millions of students into the poor house.

Catharine Hill, president of Vassar College, shovels horse manure in the New York Times about rising college costs

Catharine Hill dumped a load of horse manure on the op ed pages of the New York Times today, which is a good place to put it. In an essay expressing opposition to free college tuition, she made three bogus points:

1) College costs have gone up because state governments provide less funding to higher education than they once did.
2) Although the cost of going to college has gotten more expensive, it is still a good investment because college graduates make more on average than people who don't have college degrees.
3) The way to address the rising tide of student-loan indebtedness is better counseling and long-term repayment plans.

Let's look at Hill's three points.

First, declining state support for higher education has little to do with Vassar, which is a private institution. It costs a quarter million dollars to attend Vassar for four years, and that cost can't be explained by declining financial support from state governments.

Second, yes it is true that people who graduate from college earn more money on average than people who don't. But that doesn't justify skyrocketing college costs. Many college graduates attended relatively inexpensive state colleges. For those people, their increased earning potential justified the expense of going to college. But people who get liberal arts degrees from elite private colleges like Vassar often take on unmanageable student-loan debt. Many of them would have been better off going to an institution like Sam Houston State University in Huntsville, Texas, than borrowing money to listen to postmodern screeching by Vassar professors.

Finally, Hill's suggestion for handling the student-loan crisis is pure horse manure, and it isn't even fresh.  Hill recommends"better counseling," longer repayment periods and income-based repayment plans as the way to help students manage their crushing student-debt loads. Of course,this is exactly what the Obama administration is saying, along with higher education's professional organizations and sycophantic policy think tanks like the Brookings Institution.

Come on, Catharine. Come clean. Why don't you tell us the real reason you are opposed to free college tuition? You are opposed to it because the feds can't possibly provide free tuition for students to attend overpriced joints like Vassar. And a comprehensive  federal program offering free tuition would mean less money for elite colleges. You would prefer the status quo, whereby the exclusive colleges get the benefit of Pell grants and federal student loans--federal money you cannot operate without.

In fact, you reveal your true motivations in the last few paragraphs of your essay. "Without federal loan programs, many students could attend only schools that their families could afford from their current income or savings."  That's right, Catharine. You want students to attend colleges they can't afford. Otherwise, they might have to enroll at the University of Connecticut or Florida State. The horror! The horror!

Frankly, I would have expected more from Catharine Hill. After all she is an economist. Surely she knows that most of the people who sign up for 25-year repayment plans will never pay off their student-loan balances because their income-based loan payments won't be large enough to cover accruing interest. Surely she understands that making people pay for their college education over a majority of their working lives does not make economic sense.

But Catharine doesn't care. She just wants to keep the federal money rolling in so that places like Vassar, Yale, and Dartmouth can pay the professors and administrators more than they are worth to teach arrogant students who think they are smarter than the faculty and are probably correct.

And once a year, these condescending institutions have a dress-up day when the faculty wear medieval clothing and hand out bits of paper they insist on calling diplomas to the dunderheads who went hopelessly into debt for the privilege of wearing a t-shirt emblazoned with the name of some fancy college like Vassar.

Horse manure from Catharine Hill, president of Vassar

References

Catharine Hill. Free Tuition Is Not the Answer. New York Times, November 30, 2015, p. A23. Accessible at: http://www.nytimes.com/2015/11/30/opinion/free-tuition-is-not-the-answer.html?_r=0

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

Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.

Albert Einstein 

Liz Kelly, a 48-year old school teacher, owes the federal government $410,000 in student loans, which she will never pay back. How did that happen?

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

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

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

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

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

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

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

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

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

As the Times writer succinctly observed:

A private sector lender approached by a potential borrower with no assets, a modest income, and $350,000 in debt who had never made a payment on that loan in over 20 years would not, presumably, lend that person an addition $7,800. But that is exactly what the federal government did for Ms. Kelly. Legally it could do nothing else.

Obviously, a federal student-loan system that works this way is dysfunctional, irrational, and unsustainable. The feds should have shut off the student-loan spigot long before Kelly borrowed money to get a Ph.D.

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

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

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

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

Conclusion

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

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

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

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

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

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

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

Compound interest: The eighth wonder of the world

References

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

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

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

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