Brookings Institution researcher criticizes federal student-loan program: "It is an outrage"

Last month, Adam Looney of the Brookings Institution released a paper that is chock full of ideas for fixing the federal student-loan program. Looney began his paper with a withering condemnation of the program in its present form, which he accurately described as an outrage. I am quoting his critique verbatim, just putting his words into a bullet-style format:

• "It is an outrage that the federal government offers loans to students at low-quality institutions even when we know those schools don't boost their earnings and that those borrowers won't be able to repay their loans."

• It is an outrage that we make parent PLUS loans to the poorest families when we know they almost surely will default and have their wages and social security benefits garnished and their tax refunds confiscated . . ."

• "It is an outrage that we saddled several million students with loans to enroll in untested online programs, that seem to have offered no labor market value."

• It is an outrage that our lending programs encourage schools like USC to charge $107,484 . . . for a master's degree in social work (220 percent more than the equivalent course at UCLA) in a field where the median wage is $47,980."

All these failures, Looney charges, "are entirely the result of federal government policies." 

Nevertheless, for all its faults, Looney thinks the federal student loan program is worth fixing, and he makes several interesting reform proposals:

First, Looney recommends a cap on loans to graduate students. Currently, graduate students in the Grad PLUS program can take out student loans to pay the entire cost of their studies, no matter what the cost, which is nuts. 

This "sky is the limit" loan policy has led to the escalating cost of getting an MBA or law degree. In fact, the American Bar Association estimates that the average student at a private law school takes out  $122,000 in student loans. 

Second, Looney recommends applying an "ability-to-pay" standard to parent loans or eliminating them altogether. In my view, the Parent PLUS program should be shut down. It is insane to lure parents into financing their children's college education by taking on massive student-loan debt--debt which is almost impossible to discharge in bankruptcy.

Third, Looney recommends the REPAYE program as the default student-loan repayment plan for all students. Unless a student opts out, all student-loan borrowers would be automatically enrolled in the REPAYE program when they begin repaying their student loans.

REPAYE, introduced by the Obama administration, allows student debtors to pay 10 percent of the discretionary income (income minus 150 percent of the poverty level) for 20 years rather than attempt to pay off their loans in the standard 10-year repayment plan.

In conjunction with automatic REPAY enrollment, Looney calls for voiding all fees, capitalized interest, and collection costs on current borrowers--costs and fees they wouldn't have suffered if they had been automatically enrolled in REPAYE. In addition, he proposes to cancel all student-loan debt that is 20 years old or older--without regard to the status of these loans.

Finally, Looney calls for a halt in wage and Social Security garnishment, and an end to the Treasury Offset program--the program that allows the government to capture defaulted borrowers' tax refunds.

These are all good proposals, but I have reservations. First, is it good public policy to automatically enroll all student-loan debtors in REPAYE--a 20-year income-based repayment plan? If we go that route, we will be creating a massive class of indentured servants who will be paying a percentage of their income to the government for the majority of their working lives.

Moreover, most people in those plans will never pay back the principal on their loans and could wind up with huge amounts of forgiven debt after 20 years, which would be taxable to them as income.

Secondly, Looney's proposals--all good, as I have said--are complicated, and the Department of Education has a dismal record managing just about every aspect of the student-loan program. For example, individuals enrolled in the Public Service Loan Forgiveness program have been applying for debt relief, and the Department of Education has rejected 99 percent of all claims.

So these are my revisions to Mr. Looney's proposals:

• Amend the Bankruptcy Code to allow distressed student-loan debtors to discharge their student loans in bankruptcy like any other consumer debt.

• Shut down the Parent PLUS program immediately, and allow parents who took out Parent PLUS loans or cosigned private loans for their children to discharge those loans in bankruptcy.

• Stop funding the venal and corrupt for-profit college industry (as Senator Elizabeth Warren recommends).

• Finally (and this is basically Mr. Looney's proposal) wipe out all penalties, fees, and capitalized interest for all 45 million student-loan borrowers and stop garnishing wages, tax refunds, and Social Security checks of student debtors in default.

My proposals, Mr. Looney's proposals, and for that matter, Senator Warren's debt-forgiveness proposal are shockingly expensive. Any policy that grants student-loan forgiveness to the millions of people who deserve it will cost billions--a quarter of a trillion dollars perhaps or even more.

But let's face facts. Millions of student borrowers are not paying back their loans under the present system. Indeed, Secretary of Education Betsy DeVos acknowledged last November that only one debtor out of four is paying down principal and interest on student loans.

Let's admit that the student-loan program is a catastrophe, grant relief to its victims, and design a system of higher education that is not so hideously expensive.

Image credit: Quora.com

References

Adam Looney. A better way to provide relief to student loan borrowers. Brookings Institution, April 30, 2019.

Education Secretary Betsy Devos Hires Private Accounting Firm to Audit the Student Loan program: Asking For Bad News

Secretary of Education Betsy Devos hired McKinsey & Company, a global consulting firm, to audit the federal student loan program. Why did she do that?

After all, the Congressional Budget Office, the Government Accountability Office or the Inspector General could have done the job. Why hire a private firm?

I'm thinking Secretary DeVos and the Trump administration realize the federal student-loan program is under water. They know the news is bad, but they want to know just how bad it is. After all, Secretary DeVos compared the program to a looming thunderstorm in a speech she made last November.

It took 42 years, DeVos pointed out, for the federal student-loan portfolio to reach half a trillion dollars (1965 until 2007). It took only 6 years--2007 to 2013--for the portfolio to reach $1 trillion. And in 2018--just five years later--the federal government held $1.5 trillion in outstanding student loans. In fact, uncollateralized student loans now make up 30 percent of all federal assets.

This wouldn't be a problem if student borrowers were paying off their loans. But they're not. As DeVos candidly admitted last November, "only 24 percent of FSA borrowers—one in four—are currently paying down both principal and interest." One in five borrowers are in delinquency or default, and 43 percent of all loans are "in distress" (whatever that means).

Although DeVos did not say so explicitly, she basically acknowledged that we've arrived where we are because the government is cooking the books. Student loans now constitute one third of the federal balance sheet. "Only through government accounting is this student loan portfolio counted as anything but an asset embedded with significant risk" DeVos said. "In the commercial world, no bank regulator would allow this portfolio to be valued at full, face value."

We can hope that McKinsey and Company will give us an accurate accounting. But we already know the news will be catastrophic.  More than 7.4 million people are in income-based repayment plans (IBRPs) that stretch out for 20 and even 25 years. IBRP participants make loan payments based on their income, not the amount they borrowed. Virtually no one in these plans will ever pay off their loans. 

Millions more have their loans in deferment or are prolonging their education to postpone the day they will be obligated to start making loan payments. Thus--as DeVos disclosed--only a quarter of student-loan borrowers are paying back both principal and interest on their loans.

Over the past 15 years or so, presidential administrations have juggled the numbers to postpone the day of reckoning. "After us, the deluge," has been the watchword.  Meanwhile, university presidents are saying nothing about this looming thunderstorm. They hope the deluge won't come until they are drawing their pensions.

The McKinsey report, when it comes, will be a shock to the public consciousness. And there is only one solution. We must admit that the federal student-loan program is totally out of control and allow its victims to discharge their loans in bankruptcy.

Before the deluge: Photo Credit Yale Center for British Art

References

Michelle Hackman, Josh Mitchell, & Lalita Clozel. Trump Administration Hires McKinsey to Evaluate Student-Loan Portfolio. Wall Street Journal, May 1, 2019.

Senator Elizabeth Warren can survive Cherokee-Gate if she focuses on student-loan crisis

To my surprise, Senator Elizabeth Warren officially announced she is running for President, her head "bloodied but unbowed" by the scandal about her ethnic heritage, which I will call Cherokee-Gate.

Warren is a U.S. Senator from Massachusetts, which is remarkably tolerant of screw ups. Senator Ted Kennedy's political career survived Chappaquiddick (although Mary Jo Kopechne did not). Congressman Barney Frank continued serving in Congress after he admitted hiring a male prostitute as a personal aide. Representative Gerry Studds was elected to Congress six more times after he was censored by the House of Representatives for having a sexual relationship with a 17-year old page (the vote was 420 to 3). In fact, Studds' constituents on Martha's Vineyard gave him a standing ovation after his sex scandal broke.

So Liz came take comfort from the fact that Massachusetts probably doesn't give a damn whether she advanced her career by calling herself an American Indian. The Bay State likes to send moral reprobates to Washington DC.

But playing footsie with one's race to get ahead in the Ivy League won't play well in the Rust Belt, where the children of unemployed steel workers lack the temerity to call themselves Chippewas in order to get a college scholarship.

Thus, if Warren's presidential bid is to have legs, she needs to develop a substantive campaign platform to distract potential voters--and she needs to do it fast. How about focusing on the student-loan crisis?

Senator Kamala Harris stole a march on Warren when she came out for free college, so Liz has got to think of something sexier regarding the student-loan fiasco.  Here are some suggestions, which I hope she will embrace:

1) Legislation barring the federal government from garnishing Social Security checks of elderly student-loan defaulters, a proposal that Senator Warren and Senator Claire McCaskill proposed a few years ago.  That's a no-brainer, in my view.

2) Amending federal law to stop the IRS from treating forgiven student-loans as taxable income. Who could argue against that?

3) Capping accrued interest, penalties and refinancing fees on student loans to no more than 50 percent of the original amount borrowed. Currently, we see college borrowers whose student-loan balances have ballooned to three or four times the original loan amount. Surely that' a reasonable proposal.

4) Revising the Bankruptcy Code to allow distressed student-loan debtors to discharge their student loans in bankruptcy like any other unsecured consumer debt. Or if that lift is too heavy, at least let borrowers discharge their private student loans in bankruptcy.

5) Allowing parents to discharge their Parent Plus loans in bankruptcy if they run into financial trouble and can't pay off the loans they took out for their children's college education.

I admit I hold a grudge against Senator Warren for her Cherokee scam. After all, I grew up in Anadarko, Oklahoma; and it never occurred to me to call myself a a Nadarko Indian. Just like Liz, I've got a law degree; and Liz's eyes are bluer than mine.  If I'd played my cards right, I too might have become a Harvard law professor.  I might have been Harvard Law School's first cisgendered person of color!

But all will be forgiven as far as I'm concerned if Senator Warren will only endorse some of the proposals I've listed. And if she would do that, I think she might do very well in the Iowa caucuses.

Good News out of Kansas: A compassionate bankruptcy judge grants a 59-year-old debtor a partial discharge of her student loans

The Remarkable Case of Vicky Jo Metz

Twenty-seven years ago,Vicky Jo Metz, took out $16,613 in student loans to go to community college. Over time, she paid back 90 percent of what she borrowed--almost $15,000.

But interest accrued at the rate of 9 percent, and by the time Metz came to bankruptcy court in 2018, her debt had quadruped--that's right, quadrupled--to $67,277!

Educational Credit Management Corporation, the federal government's most ruthless student-loan debt collector, opposed discharging Metz's loans.  Put Ms. Metz in a 25-year income-based repayment plan, ECMC argued.

But Kansas Bankruptcy Judge Robert E. Nugent rejected ECMC's heartless argument.  Ms. Metz is 59 years old, Judge Nugent pointed out. By the time she finishes a 25-year IBRP, she will be 84.

ECMC testified that Metz's monthly payments under a 25-year IBRP would only be $203. But, Judge Nugent observed, such a payment is about $300 a month less than the amount necessary to pay the accruing interest. Thus, after making minimal payments for 25 years, Metz would owe $152,277.88--nine times more than she borrowed.

Under the terms of an IBRP, Ms. Metz's loan balance would be forgiven after 25 years--the entire $152,000.  But the forgiven debt would be taxable to her as income. "That," Judge Nugent remarked with powerful understatement, "could generate considerable tax liability for a retired 84-year-old living on social security."

Judge Nugent sensibly concluded that Metz could not pay back the $67,000 she currently owed while maintaining a minimal standard of living. He also concluded that Metz's financial situation was unlikely to change. In fact, with very little retirement savings, Metz's income would probably go down because she would be living almost solely on Social Security in her retirement years.

Finally, Judge Nugent determined that Metz had made a good faith effort to repay her student loans. "She has paid more than $14,000 toward this loan," he noted, "not a dime of which has gone to principal."

In short, Judge Nugent summarized: "Ms. Metz will simply never be able to afford to make a significant monthly payment on her student loan." Furthermore, requiring Metz to pay the accumulated interest "would result in undue hardship to her now and in the future.

Nevertheless, Judge Nugent stated, Metz could pay back the $16,613 she originally borrowed. So this is what Judge Nugent ordered:

Rather than be yoked to a pay-as-she-earns time bomb, Ms. Metz should instead be required to pay the principal balance of the loan, $16,613.73. Doing that would not impose an undue hardship on her within the meaning of [the undue hardship standard in the Bankruptcy Code]. Therefore, that amount is excepted from her discharge in this case and the rest of her student loan is discharged. Ms. Metz should arrange to make a monthly payment that will amortize that debt over a reasonable 5 to 10-year period.

Why the Metz Case is Important

Vicky Jo Metz's case is important for two reasons. First, Judge Nugent rejected ECMC's argument, which it has made hundreds of times, that  a distressed student-loan debtor should be forced into an income-based repayment plan as an alternative to bankruptcy relief.  As Judge Nugent pointed out, an IBRP makes no sense at all when the debtor is older and the accumulated debt is already many times larger than the original amount borrowed.

Indeed ECMC's argument is either insane or sociopathic. Why put a 59-year old woman in a 25-year repayment plan with payments so low that the debt grows with each passing month?

Second, the Metz case is important because it is the second ruling by a a Kansas bankruptcy judge that has canceled accrued interest on student-loan debt. In Murray v. ECMC, decided in 2016, Alan and Catherine Murray, a married couple in their late forties, filed for bankruptcy in an effort to discharge $311,000 in student loans and accumulated interest.

The Murrays took out a total of $77,000 in student loans back in the 1990s, and they made monthly payments totally 70 percent of what they borrowed. But, much like Vicky Jo Metz, the Murrays saw their student-loan debt grow larger and larger over the years until their debt totaled $311,000--four times what they borrowed.

Fortunately for the Murrays, Judge Dale Somers, a Kansas bankruptcy judge, granted them a partial discharge of their massive debt. Judge Somers ruled that the Murrays had managed their student loans in good faith, but they would never be able to pay back the $311,000 they owed. Very sensibly, he reduced their debt to $77,000, which is the amount they borrowed, and canceled all the accumulated interest.

Conclusion

Judge Nugent and Judge Somers have grasped the essence of the student-loan crisis. Millions of Americans are seeing their student-loan indebtedness double, triple and even quadruple as interest accrues and compounds. Vicky Jo Metz, the Murrays, and people in similar positions will never pay back their massive student-loan debt.

Putting these poor souls into 25-year income-based repayment plans denies them the fresh start that the bankruptcy courts were created to provide. Under the government's income-based repayment program, this debt will be forgiven after 25 years, but the Internal Revenue Service considers the amount of the forgiven debt to be taxable income.

This is nuts. Judge Somers and Judge Nugent demonstrated compassion and common sense when they canceled accumulated interest on massive student-loan debt owed by the Murrays and Ms. Metz. Let us hope other bankruptcy judges will begin following their example.

References

In re Murray, 563 B.R. 52, 60 (Bankr. D. Kan. 2016), aff'd sub nom. Educ. Credit Mgmt. Corp. v. Murray, No. 16-2838, 2017 WL 4222980 (D. Kan. Sept. 22, 2017).

Vicky Jo Metz v. Educational Credit Management Corporation, 589 B.R. 750 (D. Kan. 2018).

Sue Reagan v. Educational Credit Management Corporation: "A camel whose back is already broken"

Sue Reagan is 60-years old and lives in a mobile home on rented land. She has a part-time job but lives near or below the poverty line. She took out student loans to obtain a bachelor's degree in administration of justice and a master's degree in criminology, but that was long ago.

Unable to pay back her student loans under a standard ten-year repayment plan, Reagan signed up for an income-based repayment plan (IBRP). Her income is so low, however--$1,286 a month--that her monthly payments are zero dollars.

Reagan filed for bankruptcy and brought an adversary action to discharge her student loans. She argued that her student loans constituted an undue hardship and that she could not maintain a minimal standard of living and pay back those loans.

Educational Credit Management Corporation, her creditor, filed a motion for summary judgment and asked the bankruptcy court to dismiss Reagan's case without a trial.  ECMC argued that since Reagan's monthly payments were zero dollars, she could not reasonably argue that her student loans constituted an undue hardship or that her loans forced her below a minimal standard of living.

But Bankruptcy Judge Gregory Taddonio disagreed with ECMC and refused to dismiss Reagan's case. In Judge Taddonio's view, it did not matter which debt drove Reagan to the edge of poverty. "If she finds herself financially underwater, the question of which obligation pushed her below the surface matters little. To a camel whose back is already broken, any straw in his pack is unwelcome."

Judge Taddonio looked at Reagan's financial information and noted that her expenses were $119 more than her income, which was less than $1,300 a month. Moreover, her expenses were reasonable--mostly going for basic necessities. Judge Taddonio said he could not identify any expenses that could be trimmed.

So Judge Taddonio allowed Sue Reagan's adversary proceeding to go forward. Will she ultimately prevail?

Who knows? ECMC's motion to dismiss was merely the first of many arguments ECMC will make to defeat Reagan's attempt to shed her student loans. And ECMC has unlimited resources. It can hound Reagan for years right up to the Third Circuit Court of Appeals.

But Reagan's initial victory is heartening, a sign perhaps that the federal bankruptcy judges have begun to acknowledge that the federal student loan program has destroyed the lives of millions of people, most of whom deserve bankruptcy relief.

ECMC screws up: Couldn't prove Mr. Rowe owed on his daughter's student loan

Educational Credit Management Corporation [ECMC]  is the Department of Education's premier student-loan debt collector.

ECMC has appeared in literally hundreds of student-loan bankruptcy cases, and it knows all the legal tricks for defeating a student-loan borrower's efforts to discharge student loans in bankruptcy. And most of the time ECMC wins its cases.

But not always.

 Last June, Judge Catherine Furay, a Wisconsin bankruptcy judge, ruled in favor of Thomas Rowe, who sought to discharge a student loan he said he didn't owe. ECMC claimed Rowe signed a student loan on behalf of his daughter. Rowe said he didn't sign the loan and that any signature appearing on the loan document must be a forgery.

Rowe declared bankruptcy and filed an adversary proceeding to discharge the student loan ECMC claimed he owed. A trial date was set, but neither Rowe nor ECMC filed the disputed loan document with the court.

Judge Furay ordered the parties to file briefs on the burden of proof and concluded the burden was on ECMC to prove Rowe owed on the student loan. Since ECMC did not produce the loan document, Judge Furay discharged the debt.

What the hell happened?

How could ECMC,, the most sophisticated student-loan debt collector in the entire United States, not produce the primary document showing Rowe had taken out a student loan?

I can think of only two plausible explanations. First, ECMC may have had the loan document in its possession but didn't produce it because the document would show Rowe was right-- he hadn't signed the loan agreement.

Second, the loan document may have gotten lost as ownership of the underlying debt passed from one financial agency to another.

Here is the lesson I take away from the Rowe case. If you are a student-loan debtor being pursued by the U.S. Department of Education or one of  DOE's debt collectors, demand to see the documents showing you owe on the student loan.

 Most times, the creditor will have the loan document, but not always.  And, as Judge Furay ruled, the burden is on the creditor to show a loan is owed.

And so I extend my hearty congratulations to Thomas Rowe, who defeated ECMC, the most ruthless student-loan debt collector in the business. Thanks to Judge Furay's decision, Mr. Rowe can tell ECMC to go suck an egg.

References

Rowe v. Educational Credit Management Corporation, No. 17-0033-cf ( Bankr. W.D. Wis. June 28, 2018) (unpublished).

Fail State, Alexander Shebanow's Documentary about For-Profit Colleges, is an excellent movie. Go see it.

A few nights ago, I watched Fail State, Alexander Shebanow's documentary movie about the seedy for-profit college industry.  Director Shebanow did a masterful job of explaining how for-profit colleges have used deceptive recruiting techniques, strategic campaign contributions, and congressional lobbyists to rip off vulnerable Americans: minorities, the poor, and first generation college students. Over the years, the for-profits have sucked up billions of dollars in federal student-aid money while offering shoddy education programs that left their students with enormous student-loan debt and no work skills.

Shebanow's movie has two broad themes. First, the director shows the for-profit college industry for what it is: a quasi-criminal enterprise that undermines the integrity of higher education. Second, Shebanow's story showcases community colleges as the proper institutions for offering inexpensive but useful postsecondary training.

The student-loan crisis is a long, sad saga of corruption and deceit, and no 90-minute movie can cover the whole story. Nevertheless, I wish Fail State had touched on some of the reforms that could offer student-loan victims relief from crushing debt.

About 20 million people are burdened by student loans they can't pay back. This number includes students who attended for-profit colleges, private nonprofit schools, and state universities.  The Federal Reserve Bank of New York has documented that this huge level of indebtedness is undermining the national economy. In my view, the only sensible thing to do is open up the bankruptcy courts to theses sufferers and give them an opportunity for a fresh start, freed from debs they cannot pay.

Moreover, although Shebanow's indictment of the for-profit colleges is damning and irrefutable, I wish the movie had more clearly stated that this industry needs to be completely shut down. Trying to clean up this gangster industry by enacting tougher regulations will be about as effective as trying evangelize a crocodile.

In a sense, Fail State is much like The Big Short, the star-studded movie about the subprime mortgage meltdown. Both stories are sagas about greed, corruption, and governmental indifference. Shebanow directed a fine movie, and everyone thinking about enrolling at a for-profit college should be required to see it before signing on the dotted line.

References

Zachary Bleemer, et al. Echoes of Rising Tuition in Students' Borrowing, Educational Attainment, and Homeownership in Post-Recession America. Federal Reserve Bank of New York Staff Report No. 820, July 2017.

Let Justice Roll On Like A River: Richard Precht, A Virginia Man Living on $1200 a Month, Won Bankruptcy Discharge of Nearly $100,000 in Student-Loan Debt

But let justice roll on like a river, righteousness like a never-failing stream!

Amos 5:24

On July 7 2015, the Department of Education issued a letter outlining guidelines for determining when the Department and its student-loan collection agencies would not oppose bankruptcy relief for distressed student-loan debtors. DOE listed 11 factors that it would consider, including these:

1) "Whether a debtor is approaching retirement, taking into account the debtor's age at the time student loans were incurred and resources likely to be available to the debtor in retirement to repay a student loan . . ."

2) "Whether a debtor's health has materially changed since the student loan debt was incurred . . . ."

Frankly, I thought DOE's letter was insincere and that DOE would continue to oppose bankruptcy relief for nearly everyone and that it would persist in insisting that virtually every distressed student-loan debtor must be placed in a long-term income-based repayment plan. But perhaps I was wrong. 

In October 2015, Richard Precht, age 68, filed for bankruptcy and asked to have his student-loan debt discharged.  Mr. Precht as it turned out was the perfect person to test whether DOE meant what it said in its  July 2015 letter.  He was living in retirement and was in ill health and was burdened with almost $100,000 in student-loan debt.

In fact, his circumstances were desperate. Mr. Precht was living on a small pension and a small Social Security check, but both were being garnished by the federal government. His total income was only $1,200 a month and he was forced to live with his adult daughter because his income was not sufficient for him to afford housing.

Precht filed for bankruptcy in Virginia, and the federal court system quickly issued a scheduling order that put his case on track for a trial before a bankruptcy judge. Fortunately, Mr. Precht was ready to proceed with his case without delay. He had prepared nearly a thousand pages of exhibits outlining his financial circumstances, his health status, and his loan payment history over the years.

Initially, DOE opposed Precht's petition for relief. DOE's lawyer filed a motion to strike, asking the bankruptcy judge to order Precht to refile his complaint on technical grounds. But fortunately for Mr. Precht, the bankruptcy judge had read DOE's July 2015 letter. 

At the hearing, the judge pointedly asked DOE's attorney what DOE planned to do about that letter. The attorney's candid reply was, "We don't know."

But apparently, the policy makers at DOE considered the matter and decided to do the right thing. A few days after the hearing on DOE's motion to strike, the DOE attorney called Mr. Precht and said the Department would not oppose bankruptcy relief. DOE prepared an order for the bankruptcy judge to sign that relieved Mr. Precht of all his bankruptcy debt--a miracle of almost biblical proportions.

As the prophet Amos said: "Let justice roll on like a river." Mr. Precht won a life-altering victory for himself, and his case points the way for hundreds of thousands of people similarly situated. More than 150,000 elderly student-loan debtors are having their Social Security checks garnished, and millions of people are now in long-term income repayment plans that obligate them to pay on their student-loans until they are in their 70s, their 80s, and even their 90s!

Personally, I don't think Mr. Precht's victory signals a change of attitude at the Department of Education. I think he was able to prevail because he was prepared to go to trial and his case was so strong.  As of this writing, DOE still opposes bankruptcy relief for almost all student borrowers.

Nevertheless, Mr. Precht's victory is significant. His case demonstrates that truly deserving student-loan debtors who prepare good cases can prevail in bankruptcy court, even if they are not represented by an attorney.

References

Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings.  U.S. Dep’t of Educ., July 7, 2015, DCL ID: GEN-15-13.

Precht v. United States Department of Education, AD PRO 15-01167-RGM (Bankr. E.D. Va. Feb. 11, 2016 (Consent Order).

The deluge is upon us: University of Phoenix students owe the taxpayers $35 billion; and 45 percent default within five years

Earlier this month, the Brookings Institution published a report on student-loan default rates; and some of its findings are truly shocking.  The report ranked institutions based on their students' total accumulated outstanding loans. University of Phoenix, a for-profit college company, ranked number 1; almost 1.2 million University of Phoenix students have racked up more than $35 billion in outstanding student-loan obligations.

And ponder this: 45 percent of the students in the University of Phoenix's 2009 cohort defaulted on their student loans within five years  (Looney & Yannelis, 2015, table 5).

Brookings' researchers also reported that about three quarters of students (74 percent) who attended for-profit schools owed more than they originally borrowed two years after beginning repayment (for the 2009 cohort).  And nearly half of students who attended for-profit schools (47 percent) defaulted within five years of beginning repayment.

These are astonishing figures. And when we consider that a lot of former students who attended for-profit schools are enrolled in economic-hardship deferment programs and are not making loan payments, this sobering fact seems indisputable: more than half of the people who borrow money to attend for-profit colleges eventually default on their loans.

The Brookings Institution argues that the nation's high student-loan default rate can mostly be attributed to students who are "non-traditional borrowers," which it defines as students who attended for-profit colleges or two-year schools. Among all students who began repayment on their loans in 2011 and defaulted by 2013, 70 percent were nontraditional borrowers.

Loaning money for students to attend for-profit schools is irresponsible.

Based on these numbers, even a child can conclude that the federal government should not be loaning money to students who enroll in for-profit programs because taxpayers are going to get less than half of it back.  And--what is far worse--a lot of minority students and students from disadvantaged backgrounds will have student-loan debt hanging around their necks for the rest of their lives.  For these students, attending a for-profit school did not improve their lives; attending a for-profit school made their lives worse. 

Arne Duncan's Department of Education knows that the for-profit college sector is out of control, and it is made some efforts to provide student-loan debtors a little relief. For example, DOE granted loan forgiveness to about 3,000 students who attended one of Corinthian Colleges' campuses after Corinthian went bankrupt earlier this year. But there are more than 300,000 former Corinthian students.

Reasonable bankruptcy relief is the only humane remedy for non-profit students who default on their loans.

I do not think Congress or the Department of Education will ever shut off the federal-loan spigot to the for-profit colleges. This industry has protected itself with lobbyists, attorneys, and strategic campaign contributions.  Year after year, misguided students will continue to enroll at for-profit schools, and at least half will eventually default.

But  in the name of common decency, can't we at least give student-loan defaulters, who are suffering by the millions, some effective relief?  Do we have to make it so difficult for student-loan defaulters to file for bankruptcy and get a fresh start? Do we really want to force them into 25-year repayment plans, basically turning them into economic serfs for the balance of their working lives?

References

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

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

The End of the Beginning: The Corinthian Bankruptcy Case Marks a New Phase in the Meltdown of the Federal Student Loan Program

Winston Churchill, in a speech delivered after the Battle of Egypt, Britain's first major victory in the Second World War, uttered these immortal words: "Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

Something similar might be said about the recent bankruptcy filing of Corinthian Colleges, one of the largest chains of for-profit colleges, which once had enrollments totally more than 100,000 students.  Corinthian's collapse does not signal the end of federal funding for the for-profit college industry. The Department of Education will continue pouring money down the rat hole of for-profit higher education at an enormous rate--more than $30 billion per year. And the for-profits will continue to use litigation, lobbying, and strategic campaign contributions to protect their interests.

But the Corinthian bankruptcy does mark a new phase in the downward spiral of the federal student loan program. First of all, Corinthian is one of the largest for-profit college chains in the United States, with 350,000 former students. Under federal law, its closure will require the Department of Education to forgive the student loans of at least some of those students. According to the New York Times, if all 350,000 apply for loan forgiveness and those applications are granted, Corinthian's collapse will cost taxpayers about $3.5 billion.

Thus far, DOE has granted loan forgiveness to 3,000 former Corinthian students, which will cost the taxpayers about $40 million (as reported in Chronicle of Higher Education). But that's only a drop in the bucket.

Let's say half of Corinthians' ex-students are entitled to a loan discharge on the grounds that they were victims of misrepresentations or did not receive fair value for their tuition dollars, which, it seems to me, would be a reasonable estimate of the percentage who are entitled to relief.  Half of all of Corinthian Colleges' former students is about 175,000 people.  And if all those people's loans were forgiven it would cost the American taxpayers well over $2 billion.  And Corinthian is just one of many for-profits who have given students very little of value for the tuition that was paid with federal student loans.

But of course the Department of Education will never grant relief on that scale. It will bustle about the edges of the for-profit scandal, making sympathetic clucking noises while failing to confront this huge crisis. According to the Chronicle of Higher Education, DOE has received just 12,000 applications for some kind of loan relief from former Corinthian students, a small fraction of the total number of people who deserve assistance.  

Meanwhile, as DOE bureaucrats grant loan relief to a handful of  student-loan debtors who attended Corinthian campuses, DOE lawyers go into the federal bankruptcy courts again and again to oppose bankruptcy discharge for the few desperate individuals who have the temerity to seek justice through the bankruptcy process.

Nevertheless, to paraphrase Churchill, the Corinthian debacle is the end of the beginning. Whether DOE wants to admit it or not, the federal student-loan crisis is gathering steam like a locomotive and thundering down the tracks toward a disaster for America's colleges and universities.

Fortunately for President Obama and Secretary of Education Duncan, they have time to get off the tracks before the train arrives. By the time the student-loan program blows up in America's face, they will be out of office and safely ensconced in cushy academic posts at one of the elite universities that made their own contributions to the student-loan catastrophe.

Arne feels your pain--just a little bit of your pain.

References

Kelly Field, "U.S. Has Forgiven Loans of More Than 3,000 Ex-Corinthian Students, Chronicle of Higher Education, September 3, 2015. Accessible at: http://chronicle.com/article/US-Has-Forgiven-Loans-of/232855/?cid=pm&utm_source=pm&utm_medium=en


Tamar Lewin, "Government to Forgive Student Loans at Corinthian Colleges," New York Times, June 8, 2015. Accessible at: http://www.nytimes.com/2015/06/09/education/us-to-forgive-federal-loans-of-corinthian-college-students.html?_r=0

 

Lee Siegel is not the poster child for the student loan crisis: Single mothers are more typical of defaulting student-loan borrowers than self-proclaimed cultural critics

It is unfortunate--truly unfortunate--that the New York Times chose to publishe Lee Siegel's op ed essay in which he defended his decision to default on his student loans. Siegel has received a lot of negative feedback on his essay, including several letters that were published in the New York Times, and some people may have gotten the impression that Siegel is a typical student-loan debtor.

But he is not typical, and it would be tragic if Siegel becomes the poster child for the student-loan crisdis.

Americans need to understand that most student-loan defaulters are not successful, self-employed professionals like Siegel. Rather, they are typically people in desperate circumstances due a a host of negative life events (job loss, divorce, illness) that left them unable to manage their student-loan debts.  

If Americans are looking for a poster child for the student loan crisis, I nominate Alethea Lamento. 

Arethea Lamento, Not Lee Siegel, is the Poster Child for the Student Loan Crisis

As explained by a sympathetic bankruptcy court, Alethea Lamento was a 35-year-old single mother of two when she filed for bankruptcy. She was working for a grocery store chain for $10.15 an hour, and she only made ends meet for herself and her two children by living rent-free with her mother and her step-father.

Lamento had accumulated $70,000 in student loan debt while trying to obtain an education that she hoped would open the door to a better life. Unfortuantely, she married a man who, according to the bankruptcy court, was "abusive in multiple ways," and her husband did not want her to go to college. She made several attempts to get training to increase her income but she was unsuccessful due in part to the fact that she was a mother of two and married to a man who discouraged her from obtaining an education. 

As the court explained, Lamento was never able to make a voluntary payment on her student loans, and the federal government eventually began garnishing her paychecks to collect on the accumulated debt. Lamento then filed for bankruptcy.

In the bankruptcy proceedings, the U.S. Department of Education and Educational Credit Management Corporation appeared as creditors and opposed Lamento's request to have her student-loan debt discharged. They argued she should be put in a 25-year income-based repayment plan.

But a sympathetic and compassionate bankruptcy court rejected these arguments and discharged Lamento's student loans. First of all, the court pointed out, it was obvous that Arethea would not be able to maintain a minimal standard of living if she were forced to pay off her student loans.

 “At the age of 35, she has no money to pay rent or utilities for housing for herself and her two children,” the court wrote. “Without the generosity of her mother and stepfather, her family would have nowhere to live” (p. 676). Alethea’s salary did not allow her to pay rent or utilities, which the bankruptcy court considered to be basic needs. Nor did she have health insurance, which the court also considered to be a basic need. 

Alethea's creditors argued that her financial circumstances would improve, but the court did not agree.  “The evidence showed conclusively that Alethea’s financial situation is not temporary and that it is likely to persist for a significant part of the repayment period,” the court ruled.  

In the bankruptcy court's view, Alethea had filed for bankruptcy in good faith. It was true, the court acknowledged, that Alethea had made no voluntary payments on her student loans. Nevertheless, it was undisputed that with her limited income and tight budget, Alethea had never made enough money to make student-loan payments.

ECMC and the Department of Education tried to make much of the fact that Alethea had refused their offer to enter into a 25-year income-based repayment plan. In their view, her refusal to agree to a long-term repayment plan showed her lack of good faith.

But the court rejected this line of reasoning. As the court pointed out, the creditors’ position basically amounted to the argument that the only way a student-loan debtor can show good faith in a bankruptcy proceeding is to sign up for a long-term repayment plan.

The court ruled that Alethea’s reasons for rejecting a 25-year income-based repayment plan “to be credible, convincing, and offered in good faith” (p. 679). In the court’s opinion, it was clear that Alethea was not able to pay anything on her student loans and would be unable to do so in the foreseeable future. Thus her participation in an income-based repayment plan would be futile.

In addition, the court pointed out, there were burdens associated with such agreements. First, if Alethea agreed to a 25-year repayment plan, she would essentially be trading one nondischargeable debt for another. Second, signing up for such a repayment plan would require Alethea to report her income to her student-loan creditors for the next 25 years.

Finally, and perhaps most importantly, the court noted that the creditors’ insistence on a long-term repayment plan overlooked “the psychological effect” of having a significant debt obligation stretch out over a quarter of a century. “Given Alethea’s desperate circumstances, and her status as the proverbial honest but unfortunate debtor, she is entitled to sleep at night without these unpayable debts continuing to hang over her head for the next 25 years” (p. 679, emphasis supplied).

Conclusion: Millions of Student-Loan Defaulters are Entitled to Bankruptcy Relief

Perhaps Lee Siegel should have paid off his student loans, but millions of people who took our student loans in good faith don't make enough money from their jobs to pay back their loans. All these people are entitled to bankruptcy relief.

As Americans contemplate the growing student-loan disaster, they need to realize that Rober Siegel is not the typical student-loan debtor. More typical by far is Alethea Lamento, a single mother of two and an "an honest but unfortuante debtor," who deserves relief from oppressive student loans.

Note: Parts of this blog essay are taken from an article I co-authored with Robert C. Cloud and which appeared in Teachers College Record Online earlier this year. The opinions expressed in this blog are soley my own.

References

Delisle, J. & McCann, C. (2014, September 26). Who's Not Repaying Student Loans? More People Than You Think. Forbes.com. Retrieved from http://www.forbes.com/sites/jasondelisle/2014/09/26/whos-not-repaying-student-loans-more-people-than-you-think/

Fossey, R. & R. C. Cloud. (2013, November 22). "The Law Does Not Require a Party to Engage in Futile Acts”: Student Loans, Bankruptcy and a Compassionate Federal Court. Teachers College Record, http://www.tcrecord.org,  ID Number: 1733.

Fossey, R. & R. C. Cloud (2015, February 23). In Re Lamento: An Honest But Unfortunate Debtor Is Entitled To Sleep At Night Without Worrying About Unpayable Student-Loan Debt. Teachers College Record Online, http://www.tcrecord.org ID Number: 17871

In re Lamento, 520 B.R. 667 (Bkrtcy. N.D. Ohio 2014).

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

Krieger v. Educational Credit Management Corporation, 713 F.3d 882 (6th Cir. 2013).

David Marans, This Author Called for A Student Loan Boycott, And CNBC Was Not Having It. Huffington Post, June 8, 2015. Accessible at: http://www.huffingtonpost.com/2015/06/08/cnbc-student-loan-boycott_n_7537432.html

Lee Siegel. Why I Defaulted on My Student Loans. New York Times, June 7, 2015, Sunday ReviewSection, p. 4.

Student borrowers and the economy (2014, June 10). New York Times. Retrieved from http://www.nytimes.com/2014/06/11/opinion/student-borrowers-and-the-economy.html?_r=0