Dear Secretary Betsy DeVos: Please do the right thing and allow distressed debtors to discharge their student loans in bankruptcy

Dear Secretary DeVos:

You have been Secretary of Education for about  a month, so you know the federal student loan program is in shambles.

Eight million borrowers are in default, millions more aren't making payments while interest accrues on their debt, 5.6 million people have signed up for income-driven repayment plans and are making payments so small that their debt is negatively amortizing even though they are faithfully making regular payments.

Obviously, there are dozens of things the Department of Education can do to address this crisis, but you can easily do one thing to help alleviate mass suffering and it is this: Please direct DOE and all its student-loan debt collectors to stop opposing bankruptcy relief for distressed student-loan borrowers.

In 2015, Deputy Secretary Lynn Mahaffie issued a letter stating DOE and its debt collectors would not oppose bankruptcy relief for student-loan debtors if it made no economic sense to do so. But in fact, both the Department and its agents oppose bankruptcy relief in almost every case.

And here are just a few examples:

• In Myhre v. U.S. Department of Education, the Department opposed bankruptcy relief for a quadriplegic who worked full time but could not make student-loan payments and still pay the full-time caregiver he needed to dress him, feed him, and drive him to work.

• In Abney v. U.S. Department of Education,  DOE urged a bankruptcy court to put a destitute student borrower into a long term payment plan even though the debtor was living on $1200 a month and was so poor he could not afford to drive a car and was riding a bicycle to work.

• In Roth v. Educational Credit Management, ECMC fought an elderly woman's efforts to shed her student loans even though the woman had a monthly income of less than $800 a month and suffered from several chronic health problems.

• In Edwards v. Educational Credit Management Corporation, ECMC argued to an Arizona bankruptcy judge that a 56-year-old counselor who owed $245,000 in student loans should be put in a 25-year repayment plan whereby she would make token payments until she was 81 years old!

Some of these cases were decided before Mahaffie's 2015 letter and some were decided after, but the dates are immaterial. DOE and its agents almost always oppose bankruptcy relief for student-loan debtors, no matter how desperate their circumstances.

In fact, DOE's position is essentially this: NO STUDENT DEBTOR IS ENTITLED TO BANKRUPTCY RELIEF. Instead, everyone should be placed in income-driven repayment plan  (IDR) that can last for 20 or even 25 years.

But you could change DOE's position simply by signing your name to a single letter. That letter should say that DOE and its debt collectors will no longer oppose bankruptcy relief for student debtors who cannot pay back their college loans and still maintain a minimal standard of living. And DOE will no longer argue that IDRs are a reasonable alternative to bankruptcy relief.

If you did that, hundreds of thousands of insolvent college-loan borrowers could discharge their student debt in bankruptcy and get a fresh start--a fresh start the bankruptcy courts were established to provide.

Your advisers may argue that the IDR program offers college borrowers a reasonable way to ultimately pay off their student loans, but that's not true. Do you think Rita Edwards would have ever paid back the $245,000 she owed the government by making payments of $81 a month in an IDR as ECMC proposed in her bankruptcy case? Of course not.

Do you think Janet Roth would have ever paid back her student-loan debt of $90,000 if she had been put in an IDR that would have set her monthly payments at zero due to her low income? No, and it was absurd for ECMC to have made that argument in Roth's bankruptcy case.

The stark reality is this. Millions of student borrowers have seen their loan balances double, triple and even quadruple due default fees and accruing interest. Putting these people into 20 and 25-year repayment plans that only require them to make token payments is insane.

Secretary DeVos, you could eliminate so much suffering if you would simply write a letter stating that DOE will no longer oppose bankruptcy relief for people like Myhre, Edwards, Roth, Abney and millions of other people in similar circumstances who will never pay back their student loans.

Please do the right thing.

References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Annual Report of the CFPB Student Loan Ombudsman. Consumer Financial Protection Bureau, September 2016.

Ann Carrns. How to Dig Out of Student Loan Default. New York Times, October 21, 2016.

Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013.

Edwards v. Educational Credit Management Corporation, Adversary No.. 3:15-ap-26-PS, 2016 WL 1317421 (Bankr. D. Ariz. March 31, 2016).

Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015.

Myhe v. U.S. Department of Education, 503 B.R. 698 (Bankr. W.D. Wis. 2013).

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP 2013). Available at http://cdn.ca9.uscourts.gov/datastore/bap/2013/04/16/RothV%20ECMC%20opinion-FINAL%20AZ-11-1233.pdf

Matt Sessa. Federal Student Aid Posts Updated Reports to FSA Data Center. U.S. Department of Education Office of Student Aid, December 20, 2016.

Edwards v Navient: A single mom's private student loans are discharged in bankruptcy but not her federal loans

Edwards v. Navient Solutions, Inc., decided last November, contains both good news and bad news for distressed student loan debtors.

The good news is this: Paula Maxine Edwards, a single mother of two children, was able to discharge $56,640 in private student loans under the Bankruptcy Code's "undue hardship" standard. Judge Janice Miller Karlin, a Kansas bankruptcy judge, ruled that Edwards had managed her private loans in good faith, in spite of the fact she had made only a few payments on them.

And this is the bad news: Judge Karlin ruled that Edwards could not discharge $72,000 in federal student loans because Edwards was eligible to enter an income-driven repayment plan (IDR) that allowed her to make loan payments based on her income over a 20-year span.  At her current income, Edwards would only be obligated to pay $21 a month. Obviously, this token monthly payment will not cover accruing interest on $72,000, which means Edwards will never pay off her federal loans.

The Edwards case: Another chronicle of student-loan misery

Paula Edwards, age 36, obtained a bachelor's degree in education from Newman University, a small Catholic college located in Wichita, Kansas. Newman University is expensive; currently, tuition and fees total about $28,000 a year. Although Edwards worked as a paralegal while she was in school and took no unnecessary courses, she wound up owing $151,000 in student loans.

Edwards' degree from Newman qualified her for a job as an elementary school teacher. At the time of her bankruptcy proceedings, she was in her fourth year as a teacher, and her annual salary was only $35,300. Unless Edwards obtains more education, which she cannot afford, her salary is capped at $35,700.

Edwards' student-loan debt fell into two categories. First, she borrowed $72,000 in federal student loans, which were eligible for modified payment terms. Second, she took out  private loans totally $56,640 from Navient Solutions. Her private loans contained no provision for modified payment terms and bore interest at the rate of 9.75 percent. (She also borrowed $8,354 from Navient for Stafford loans, which she did not attempt to discharge).

Judge Karlin refused to discharge Edwards' federal loans. The Department of Education represented that Edwards was eligible to participate in the Department's REPAYE program, which allowed her to make payments based on her income over 20 years. At her current salary, DOE told the court, Edwards would only be obligated to make payments of $21 a month.  Edwards admitted she could make payments in this amount, and this debt was not discharged.

Applying the Brunner test, Judge Karlin discharged Edwards' private student loans

However, Judge Karlin discharged Edwards' private loans owed to Navient. The judge noted that private loans, unlike federal loans, contain no provisions for alternative repayment plans such as REPAYE. Applying the three-pronged Brunner test, Judge Karlin concluded that repaying the private loans would be an undue hardship for Edwards.

Judge Karlin ruled that Edwards met the first prong of the Brunner test, which required her to show she could not maintain a minimal standard of living if she were forced to pay back her private loans. Moreover, in Judge Karlin's opinion, Edwards met Brunner's second prong by showing that her financial situation was not likely to improve any time soon. As the judge pointed out, Edwards worked in a low-paying profession, and it was "highly unlikely" that Edwards' salary would increase significantly.

Finally, and perhaps most importantly, Judge Karlin ruled that Edwards met the third prong of the Brunner test, which obligated her to show she had made a good faith effort to repay her student loans. Although Edwards had made no payments on her private student loans over the previous six years, her payment history did not preclude a good faith finding.

As Judge Karlin explained, the Brunner test "requires the Court to determine if the debtor has made a good faith effort to repay the loan as measured by his or her efforts to obtain employment, maximize income and minimize expenses . . . .  A finding of good faith is not precluded by a debtor's failure to make a payment."

In Judge Karlin's view, Edwards had demonstrated "that she was really unable to make anything but a de minimus payment, if at all, on her student loans during the last six years." While it was true, the judge acknowledged, that Edwards had received tax refunds from time to time, good faith was not precluded by the fact that she had used the refunds to meet other pressing financial obligations rather than apply the refunds to her student loans.

[W]hile it would be better for her case had she paid even $10 a month from her tax refunds, in light of her life situation--attempting to raise two children on her own with very little child support, and with a small income even giving her teaching degree--her minimal efforts should qualify under the totality of circumstances. There was no evidence she willfully or negligently caused her own default, and the Court does not believe she did.

Conclusion: A Pyrrhic victory 

Edwards v. Navient Solutions, Inc. is a mixed bag for student-loan debtors. On the positive side, the court interpreted the "good faith" prong of the Brunner test in a sensible way. A debtor's good faith is not determined by the number of loan payments made but rather on whether the debtor made good faith efforts to repay student loans by maximizing income and minimizing expenses. In Judge Karlin's view, Edwards met Brunner's good-faith prong even though she made no payments on her private loans for six years.

Unfortunately, Judge Karlin refused to discharge Edwards' federal student loans due at least partly to the fact that Edwards was eligible to participate in REPAYE, which allows Edwards to make minimal payments of only $21 a month based on her current income. Since monthly payments of $21 won't cover accruing interest, Edwards' federal loans will negatively amortize--her debt will grow larger with each passing year.

Other courts have rejected creditors' arguments that college debtors should be forced into income-driven repayment plans as an alternative to bankruptcy relief. In the Abney case, the Lamento case and the Halverson case, courts explicitly recognized the psychological stress a long-term repayment plan can put on a debtor.

Paula Edwards won a Pyrrhic victory in a Kansas bankruptcy court. She shed $58,000 in private student-loan debt, but she was forced into a long-term repayment plan for her federal loans that will require her to make token payments for 20 years. Given Edwards' likely income trajectory, she will undoubtedly owe double the amount she borrowed at the end of the 20 year payment term--not a just outcome for a single mother of two who made a good faith effort to pay off her student loans.

References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Edwards v. Navient Solutions, Inc., 561 B.R. 848 (Bankr. D. Kansas 2016).

Halverson v. U.S. Department of Education, 401 B.R. 378 (Bankr. D. Minn. 2009).

Lamento v. U.S. Department of Education, 520 B.R. 667 (Bankr. N.D. Ohio 2014).

A Kansas bankruptcy court discharged all the accrued interest on a married couple's student loans: Murray v. ECMC

Do you remember political consultant James Carville's famous line during the 1992 presidential campaign? "It's the economy, stupid," Carville supposedly observed. That eloquently simple remark became Bill Clinton's distilled campaign message and helped propel him into the presidency.

Something similar might be said about the student-loan crisis: "It's the interest, stupid." In fact, for many Americans, it is the interest and penalties on their student loans--not the amount they borrowed--which is causing them so much financial distress.

The Remarkable case of Murray v. Educational Credit Management Corporation

This truth is starkly illustrated in the case of Murray v. Educational Credit Management Corporation, which was decided last December by a Kansas bankruptcy judge.  At the time they filed for bankruptcy, Alan and Catherine Murray owed $311,000 in student-loan debt, even though they had only borrowed about $77,000. Thus 75 percent of their total debt represented interest on their loans, which had accrued over almost 20 years at an annual rate of 9 percent.

As Judge Dale Somers explained in his ruling on the case, the Murrays had taken out 31 student loans back in the 1990s to obtain bachelor's degrees and master's degrees. In 1996, when they consolidated their loans, they only owed a total of $77,524.

Over the years, the Murrays made loan payments when they could, which totaled $54,000--more than half the amount they borrowed. Nevertheless, they entered into several forbearance agreements that allowed them to skip payments; and they also signed up for income-driven repayment plans that reduced the amount of their monthly payments. Meanwhile, interest on their debt continued to accrue. By the the time the Murrays filed for bankruptcy in 2014, their $77,000 debt had grown to almost a third of a million dollars.

The Murrays' combined income was substantial--about $95,000. Educational Credit Management Corporation (ECMC), the creditor in the case, argued that the Murrays had enough discretionary income to make significant loan payments in an income-driven repayment plan.  In fact, under such a plan, their monthly loan payments would be less than $1,000 a month,

But Judge Somers disagreed. Interest on the Murrays' debt was accruing at the rate of $65 a day, Judge Somers pointed out--about $2,000 a month. Clearly, the couple would never pay off their loan under ECMC's proposed repayment plan. Instead,  their debt would grow larger with each passing month.

On the other hand, in Judge Somers' view, the Murrays had sufficient income to pay off the principle of their loan and still maintain a minimal standard of living. Thus, he crafted a remarkably sensible ruling whereby the interest on the Murrays' debt was discharged but not the principle. The Murrays are still obligated to pay the $77,000 they borrowed back in the 1990s plus future interest on this amount, which would begin accruing at the rate of 9 percent commencing on the date of the court's judgment.

Judge Somers Points the Way to Sensible Student-Debt Relief

In my view, Judge Somers' decision in the Murray case is a sensible way to address the student debt crisis.  Eight million people have defaulted on their loans, and 5.6 million more are making token payments under income-driven repayment plans that are often not large enough to cover accruing interest. Millions of Americans have obtained loan deferments that allow them to skip their loan payments; but these people--like the Murrays--are seeing their loan balances grow each month as interest accrues.

Judge Somers' decision doesn't solve the student-loan crisis in its entirety, but it is a good solution for millions of people whose loan balances have doubled, tripled and even quadrupled due to accrued interest, penalties, and fees.

Obviously, Judge Somers' solution should only be offered to people who dealt with their loans in good faith.  Judge Somers specifically ruled that the Murrays  had acted in good faith regarding their loans. In fact, they paid back about 70 percent of the amount they borrowed.

Unfortunately, but not surprisingly, ECMC appealed the Murray decision, hoping to overturn it. Nevertheless, let us take heart from the fact that a Kansas bankruptcy judge reviewed a married couple's financial disaster and crafted a fair and humane solution.


References

Murray v. Educational Credit Management Corporation, Case No. 14-22253, ADV. No. 15-6099, 2016 Banrk. LEXIS 4229 (Bankr. D. Kansas, December 8, 2016).

Sandy Baum's new book on student debt contains some good ideas

In the past,  I have been critical of Sandy Baum's work on the federal student-loan program. In my view, she sometimes drastically understated the enormity of the student-loan crisis. But her new book, titled Student Debt: Rhetoric and Realities of Higher Education Financing, contains some good ideas, which I endorse.  Here are some of her most important recommendations:

"Don't Garnish Social Security Payments." I have long argued that the federal government should stop garnishing the Social Security checks of elderly student-loan defaulters. Baum agrees. As she put it, it is one thing for the government to garnish wages of student-loan defaulters or scoop up defaulters' tax refunds, but "[f]urther diminishing the living standards of senior citizens . . . with no potential for labor market earnings who are struggling to make ends meet on their Social Security payments is quite another thing." Bravo.

Stop giving private lenders special protection in the bankruptcy courts. In 2005, Congress amended the Bankruptcy Code to make private student loans nondischargeable in bankruptcy unless the borrower could show "undue hardship," the same standard that applies to federal student loans. This is wrong.

As Baum observed, "[t]here is no good reason for the government to sanction these unsecured loans as student loans or to grant them any special provisions, particularly . . ., protection from bankruptcy proceedings." This is an eminently sensible observation, and other respected policy commentators agree with Baum on this.

Treat student loans like any other unsecured debt in bankruptcy. I have argued for years that student loans should be treated like any other unsecured debt in bankruptcy and that the "undue hardship" provision in the Bankruptcy Code should be repealed or at least interpreted far more humanely. 

I was heartened to read that Baum, a leading expert on the federal student loan program, agrees with me on this point. Indeed, reforming bankruptcy laws to allow distressed student-loan debtors relief from oppressive student loan debt is the key to reforming the entire student loan program.

Other reforms Baum proposes. Baum made some other good points in her book. For example, some limits should be placed on the amount of money people can borrow to fund their college studies; and some limit needs to be placed on the amount of interest that can accrue on student-loan debt. She also said limits should be placed on the amount elderly people can borrow to fund their studies since they won't work long enough to pay off enormous amounts of student-loan debt.

Baum makes other good points in her book. But the reforms I've listed here are critical.  If the policy makers aren't going to listen to me (and so far they have not), then perhaps they will listen to Sandy Baum.

References

Sandy Baum. Student Debt: Rhetoric and Realities of Higher Education Financing. New York: Palgrave-MacMillan, 2016. 

Betsy DeVos, Trump's choice for Secretary of Education, has the power to ease the suffering of student-loan debtors

Betsy DeVos, Donald Trump's choice for Secretary of Education, has no experience in higher education, and that may be a good thing for student-loan debtors.

Most commentators on the student-loan crisis are insiders who want to maintain the status quo regarding the federal student loan program. The universities depend on regular infusions of student-loan money, which enables them to raise their tuition prices year after year at twice the rate of inflation.

But DeVos has no ties to higher education at all, and thus she has the capacity to look at the student-loan catastrophe from a fresh perspective. In fact, DeVos has the power to do one simple thing that could potentially bring relief to millions of distressed student-loan debtors.

Under current bankruptcy law, debtors cannot discharge their student loans in bankruptcy unless they can show that repaying the loans will cause them "undue hardship."  In nearly every case, the Department of Education and the student-loan guaranty companies argue that student-loan debtors should be denied bankruptcy relief under the undue hardship standard.

Instead, they routinely demand that distressed college borrowers enroll in long-term income-based repayment plans that can last for 20 or even 25 years.  And DOE and its debt collectors make this demand even when debtors' income is so low that they pay nothing or next to nothing under the terms of these plans.

Here are some examples:

• In the Edwards case, decided last spring, Educational Credit Management (ECMC) argued that Rita Gail Edwards, a woman in her mid-50s, should pay $56 a month for 25 years to service a debt of almost a quarter of a million dollars! 

• In the Roth case, ECMC opposed bankruptcy relief for Janet Roth, an elderly woman with chronic health problems who was living on Social Security income of less than $800 a month. Instead, ECMC wanted Roth to enter a long-term repayment plan even though ECMC conceded that Roth's income was so low that she would pay nothing under the plan. 

• In the Abney case, DOE wanted Abney, a 40-year-old father of two, to enter a 25-year income-based repayment plan. Abney was living on $1200 a month and was so poor he couldn't afford a car and rode a bicycle to get to his job.

In essence, DOE and the debt collectors maintain that almost no one is entitled to discharge their student loans in bankruptcy and that everyone should be placed in long-term, income based repayment plans.

What if Secretary DeVos simply decreed that DOE and the loan guaranty agencies will stop pushing long-term repayment plans in the bankruptcy courts and would consent to bankruptcy discharges for people like Roth, Edwards, and Abney? (Incidentally, in all three cases, the bankruptcy courts rejected the creditors' arguments and discharged the student loans in their entirety.)

By consenting to bankruptcy discharges for people like Abney, Edwards and Roth, the Department of Education would signal to the bankruptcy courts that it supports a less harsh interpretation of the "undue hardship" standard. That would open the door for thousands of people of distressed debtors to file bankruptcy to discharge their student loans.

Some people might argue that my proposal would unleash a flood of bankruptcy filings that would undermine the financial integrity of the federal student loan program. But let's face facts. People like Roth, Edwards and Abney would never have paid back their student loans, and placing them in 25-year repayment plans that would have obligated them to make token payments that would have done nothing more than maintain the cynical fiction that their loans weren't in default.

Wouldn't it be better for DOE to be candid about the student-loan crisis and admit that millions of people will never pay back their loans? Wouldn't it be better public policy to allow honest but unfortunate debtors to get the fresh start that the bankruptcy courts are intended to provide?

Betsy DeVos is fresh on the scene of the student-loan catastrophe. Let's hope she brings some fresh thinking to the U.S. Department of Education.

Mark http://www.nytimes.com/2016/11/23/us/politics/donald-trump-president-elect.html?action=click&contentCollection=Opinion&module=RelatedCoverage&region=EndOfArticle&pgtype=article

The student loan crisis and the first 100 days: Please, President Trump, provide bankruptcy relief for distressed student-loan debtors

Hillary Clinton lost the presidential election, and we can throw her promise of a tuition-free college education in the ashcan. Meanwhile, the student loan crisis grows worse with each passing month.

Eleven million people have either defaulted on their loans or are delinquent in their payments. More than 5 million student-loan debtors are in long-term income based repayment plans that will never lead to loan payoffs.Several million student borrowers have loans in deferment or forbearance while interest continues to accrue on their loan balances.

Soon we will have a new president, and an exciting opportunity to look at the federal student loan program from a fresh perspective. What can President Trump do to bring relief to distressed college-loan debtors. Here are some ideas--respectfully submitted:

FIRST, TREAT THE WOUNDED.

President Trump can do several things quickly to alleviate the suffering.

Stop garnishing Social Security checks of loan defaulters. More than 150,000 elderly student-loan defaulters are seeing their Social Security checks garnished. President Trump could stop that practice on a dime. Admittedly, this would be a very small gesture; the number of garnishees is minuscule compared to the 43 million people who have outstanding student loans. But this symbolic act would signal that our government is not heartless.

Streamline the loan-forgiveness process for people who were defrauded by the for-profit colleges. DOE already has a procedure in place for forgiving student loans taken out by people who were defrauded by a for-profit college, but the administrative process is slow and cumbersome. For example, Corinthian Colleges and ITT both filed for bankruptcy, and many of their former students have valid fraud claims. So far, few of these victims have obtained relief from the Department of Education.

Why not simply forgive the student loans of everyone who took out a federal loan to attend these two institutions and others that closed while under investigation for fraudulent practices?

Force for-profit colleges to delete mandatory arbitration clauses from student enrollment documents. The Obama administration criticized mandatory arbitration clauses, but it didn't eliminate them. President Trump could sign an Executive Order banning all for-profit colleges from putting mandatory arbitration clauses in their student-enrollment documents.

Banning mandatory arbitration clauses would allow fraud victims to sue for-profit colleges and to bring class action suits. And by taking this step, President Trump would only be implementing a policy that President Obama endorsed but didn't get around to implementing.

Abolish unfair penalties and fees. Student borrowers who default on their loans are assessed enormous penalties by the debt collectors--18 percent and even more. President Trump's Department of Education could ban that practice or at least reduce the penalties to a more reasonable amount.

PLEASE PROVIDE REASONABLE BANKRUPTCY RELIEF FOR DISTRESSED STUDENT-LOAN DEBTORS.

The reforms I outlined are minor, although they could be implemented quickly through executive orders or the regulatory process. But the most important reform--reasonable access to the bankruptcy courts--will require a change in the Bankruptcy Code.

Please, President Trump, prevail on Congress to abolish 11 U.S.C. 523(a)(8) from the Bankruptcy Code--the provision that requires student-loan debtors to show undue hardship as a condition for discharging student loans in bankruptcy.

Millions of people borrowed too much money to get a college education, and they can't pay it back. Some were defrauded by for-profit colleges, some chose the wrong academic major, some did not complete their studies, and some paid far too much to get a liberal arts degree from an elite private college. More than a few fell off the economic ladder due to divorce or illness, including mental illness.

Regardless of the reason, most people took out student loans in good faith and millions of people can't pay them back. Surely a fair and humane justice system should allow these distressed debtors  reasonable access to the bankruptcy courts.

President Trump can address this problem in two ways:

• First, the President could direct the Department of Education and the loan guaranty agencies (the debt collectors) not to oppose bankruptcy relief for honest but unfortunate debtors--and that's most of the people who took out student loans and can't repay them.

• Second, the President could encourage Congress to repeal the "undue hardship" provision from the Bankruptcy Code.

Critics will say that bankruptcy relief gives deadbeat debtors a free ride, but in fact, most people who defaulted on their loans have suffered enough.from the penalties that have rained down on their heads.

More importantly, our nation's heartless attitude about student-loan default has discouraged millions of Americans and helped drive them out of the economy. President Trump has promised middle-class and working-class Americans an opportunity for a fresh start. Let's make sure that overburdened student-loan debtors get a fresh start too.

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

Andrew Kreighbaum, Warren: Education Dept. Failing Corinthian Students. Inside Higher Ed, September 30, 2016. Accessible at https://www.insidehighered.com/quicktakes/2016/09/30/warren-education-dept-failing-corinthian-students

Senator Elizabeth Warren to Secretary of Education John B. King, Jr., letter dated September 29, 2016. Accessible at https://www.warren.senate.gov/files/documents/2016-9-29_Letter_to_ED_re_Corinthian_data.pdf

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

U.S. Department of Education. U.S. Department of Education Takes Further Steps to Protect Students from Predatory Higher Education Institutions. March 11, 2016. Accessible at http://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-students-predatory-higher-education-institutions?utm_content=&utm_medium=email&utm_name=&utm_source=govdelivery&utm_term=

U.S. 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

Democratic Party Platform Plank on Higher Education: A Big Pile of Horse Manure

The Democratic Party released its Platform this week, or rather it released a draft marked "Deliberative and Predecisional." The Higher Education plank is only a few hundred words long, but it still adds up to one big pile of horse manure.

First, the Democrats promise to cut interest rates on student loans, "thereby preventing the federal government from making billions of dollars in profits from student loans." What was the Platform Committee smoking when it wrote that sentence?

Everyone who knows even a little bit about the student-loan crisis realizes that the federal government is not making a profit on student loans. It is incurring huge losses--losses that are growing by the day.

Why do I say this? First of all, the student-loan default rate is catastrophic--far higher than the anemic rate the Department of Education publishes every autumn. The Brookings Institution reported that almost half of students who take out loans to attend a for-profit institution default in five years. The five-year default rate for students overall is 28 percent.

Moreover, the Obama administration is pushing distressed student-loan borrowers into long-term repayment plans that set monthly payments so low that borrowers are not paying down accruing interest. In fact, more than half of student borrowers are seeing their loan balances go up two years after beginning the repayment phase of their loan--not down.

Do the Brookings numbers indicate to you that the government is making a profit on the student loan program? Of course not. And the fact that Senators Elizabeth Warren, Charles Schumer, Barbara Boxer, and now the whole Democratic Party insist that the government is reaping huge profits off the student loan program demonstrates that the Democrats are clueless about the student-loan crisis or that they are lying about it.

The Democrats also promise to "simplify and expand access to income-based repayment so that no student loan borrowers have to pay more than they can afford." In other words, the Democrats want to push more and more student borrowers into 20- or 25-year income based repayment plans (IBRPs).

Five million people are in IBRPs now; and President Obama wants to enroll 2 million more by the end of next year. Apparently, the Democrats want to increase that number even further.

Of course, IBRPs are nothing more than a conspiracy by our government to create a giant class of sharecroppers who will pay a percentage of their incomes to Uncle Sam over the majority of their working lives.

And finally, the Democrats pledge to "restore the prior standard in bankruptcy law to allow borrowers with student loans to discharge their debts in bankruptcy as a measure of last resort." I interpret this pie-in-the-sky promise to mean the Democrats will delete the "undue hardship" provision from the Bankruptcy Code.

I hope that is a promise the Democrats will keep if Hillary becomes President. If Congress would actually strike the "undue hardship" standard from the Bankruptcy Code, millions of Americans would be lining up to file bankruptcy within a week after the law is changed. And if distressed student-loan borrowers could truly get relief from their oppressive student-loan debt, a half trillion dollars in student loans would be wiped off the books.

That scenario would cause the student-loan program to collapse, which would cause hundreds of colleges and universities to close.

Our government will never let that happen. Which is why the Democratic Party's Higher Education platform is a big pile of horse manure.

Senators Schumer and Warren: Shoveling horse manure

References

Democratic Party Platform Draft, July 1, 2016 [Deliberative and Predecisional]. Accessible at https://demconvention.com/wp-content/uploads/2016/07/2016-DEMOCRATIC-PARTY-PLATFORM-DRAFT-7.1.16.pdf

Schumer and Warren Pushing Obama to Address Student Debt. CNN Transcript, January 12, 2016. Accessible at http://www.cnn.com/TRANSCRIPTS/1601/12/nday.06.html

Democrartic Senators Highlight Obscene Government Profits Off Student Loan Program. Senator Warren press release, January 31, 2014. Accessible at https://www.warren.senate.gov/?p=press_release&id=329

Decena v. Citizens Bank: A woman borrowed $161,000 to attend medical school in Africa and discharged the debt in bankruptcy

Lorelei Decena, an American, attended medical school at St. Christopher's College of Medicine in Senegal, West Africa.  After completing the program in 2004, she returned to the United States only to learn that St. Christopher's was not an accredited medical school and that she was not eligible to take the medical board exams in many states.

Decena financed her medical studies with a series of loans totaling $161,592, which she took out from Citizens Bank, which is headquartered in Rhode Island. She made loan payments from 2006 until 2011, but she quit making payments when she returned to school to obtain a masters' degree.

In 2015, Decena filed a "no asset" Chapter 7 bankruptcy petition and later filed an adversary complaint to discharge her student loans with Citizens Bank. Citizens Bank failed to answer her complaint and the court clerk entered a default.

At a hearing to get a default judgment entered against Citizens, an attorney appeared to represent the bank. Citizens' attorney argued that the default should be set aside on the ground that Decena had sent her lawsuit by regular mail rather than certified mail. The bankruptcy court  rejected this argument, reasonably pointing out that Citizens obviously had notice of Decena's lawsuit because it had sent a lawyer to defend the bank's interests.

The court then considered whether Decena had a legitimate ground for discharging her student-loan debt in bankruptcy. Interestingly, Decena did not argue that it would be an undue hardship for her to pay back the loans--the position taken by most student-loan debtors in bankruptcy. Rather she maintained that the loan was not the kind education loan debt that was covered by the undue hardship exception.

The court agreed with her. In essence, the court ruled that a private loan to attend an unaccredited, unlicensed medical school is not the kind of loan that can be excepted from discharge in bankruptcy under the undue hardship rule. Nor was it a "qualified education loan" that came under the undue hardship exception.

Key to the court's decision was its finding that St. Christopher's College of Medicine was not listed in the Federal Schools Code during the year Decena completed her studies. Thus, the court ruled, Decena "established a prima facie case that St. Christopher's is not an 'eligible educational institution,'" entitled to benefit from the Bankruptcy Code's undue hardship rule.

What can we learn from this quirky case? Three things:

1. Don't enroll in an unlicensed, unaccredited African medical school if you want to practice medicine in the United States. Perhaps Lorelei Decena should have investigated St. Christopher's a little more thoroughly before borrowing money to study there.

2. If you are a bank, don't lend money to someone to study medicine in Africa unless the institution the debtor will attend is on the Federal Schools Code list. Citizens Bank was apparently under the impression that its loans to Decena could not be easily discharged in bankruptcy, but the bank was wrong.

3. If you are an African medical school that seeks to enroll American students, you should make sure your institution is listed in the Federal Schools Code.

In fact, St. Christopher's lapse in this regard is puzzling. Over 500 foreign institutions are listed on the Federal Schools Code, making them eligible to participate in the U.S. student loan program, including more than two dozen foreign medical schools. Why didn't St. Christopher's do whatever it had to do to get its name on that list?

This case illustrates the global expanse of the federal student loan program, which allows Americans to borrow money to attend colleges all over the world (although not St. Christopher's in Senegal). We are a wealthy nation of more than 300 million people. You would think we could manage medical education in such a way that no one would need to borrow money in order to study medicine in a foreign country.

_______________________________________________

Note. St. Christopher's web site contains these statements: 

Graduates of St. Christopher Iba Mar Diop College of Medicine may practice medicine in the United States through the Educational Commission for Foreign Medical Graduates (ECFMG).  

*****

It is important that future students intending on practicing medicine in the United States obtain licensing information direct from the appropriate state agencies. This information can be obtained from the Federal State Medical Boards (FSMB). Students are expected to have a thorough understanding of medical licensure laws in their state or states of intended practice before applying. Many states have specific rules and requirements beyond the medical school curriculum and applicants are urged to make specific inquiries into what these are before making a commitment to the College.

References

Decena v. Citizens Bank, 549 B.R. 11 (Bankr. E.D.N.Y. 2016).

The Department of Education almost always fights bankruptcy relief for distressed college-loan borrowers--even when it pointless to do so: You'll never get out of this world alive.

I'll never get out of this world alive.

Hank Williams

Last July, Lynn Mahaffie, Deputy Secretary of Education, issued an insincere letter regarding the Department of Education's position concerning bankruptcy relief for college-loan debtors.

In that letter, Mahaffie outlined when DOE would not oppose bankruptcy relief for student-loan borrowers. She listed eleven factors to consider when determining when DOE would agree to permit a bankrupt debtor to discharge student loans in a bankruptcy court. Besides, Mahadffie said the Department would not oppose a bankruptcy discharge if it would not make economic sense to fight a student-loan borrower's petition for relief.

But in fact, Mahaffie wasn't telling the truth. Bankruptcy court opinions decided after Mahaffie wrote her letter show that DOE opposes bankruptcy relief for almost everyone--even when it is evident a debtor will never repay his or her college loans.

Let's review Kelly v. U.S. Department of Education, decided less than two months ago. Cynthia Kelly, a woman in her sixties, filed for bankruptcy in August 2014. At the time of her filing, Kelly had accumulated $160,000 in college-loan debt; and she had had no steady employment for almost 10 years. In fact, she was receiving nearly $200 a month from the local Department of Social Services in food assistance.

Before filing, Kelly was approved for an "Income-Contingent Repayment Plan" (ICRP) that reduced her monthly student-loan payment obligation to zero because her income was so low. Based on her employment history, it seems highly unlikely that Kelly will ever be required to pay a single penny on her student loans under her ICRP because she will probably live at the poverty level for the rest of her life.

Nevertheless, the Department of Education opposed Kelly's bankruptcy application to discharge her student loans, and Judge David Warren, a North Carolina bankruptcy judge, refused to release her from the debt. In the judge's view, Kelly failed the second prong of the Brunner "undue hardship" test because she could not show "additional circumstances" that precluded her from paying back her loans in the future.

Indeed, Judge Warren was totally unsympathetic to Ms. Kelly's situation.  The judge pointed out that Kelly had taken out student loans over a period of 40 years and had paid almost none of it back (less than $2,300).  Moreover, she had left a secure job with a pharmaceutical company in 2004 to do community service work and had never had steady employment since that time. Although Kelly argued that she had made diligent efforts to find remunerative work, Judge Warren ruled that there was no evidence that she had ever "pounded the payment" to find a job.

Judge Warren pointed out that Kelly appeared to be in good health and was well educated, having both a bachelor's degree, a master's degree, and a doctorate. He seemed offended by the fact that a highly educated person was getting food assistance.  Kelly's "lack of desire and motivation is an insult to those similarly situated," the judge observed, "especially to those lacking the gift of an education." In the judge's opinion, this insult was further compounded "by [Kelly's] complacent acceptance of welfare . . . "

I fully agree with Judge Warren that Kelly is not an attractive candidate for bankruptcy relief.  As the judge pointed out, Kelly took out student loans for nearly 40 years to obtain a lot of post-secondary education. Yet, she chose to live a "voluntary lifestyle" of community service rather than make reasonable efforts to maximize her income.

But let's face it. Ms. Kelly (or Dr. Kelly) will never pay off $160,000 in student loans. Her ICRP requires her to pay nothing due to her poverty-level income. It is totally unrealistic to believe that a woman in her sixties who hasn't held a steady job in ten years will obtain a well-paying job in today's economy.

Moreover, the colleges and universities that took Ms. Kelly's tuition money over a forty-year period bear a good deal of the blame for the situation Kelly is in now. According to Judge Warren, Kelly enrolled at multiple institutions, including Stone School, University of New Haven, Southern New Hampshire University, Spelman College, Drew University, South New Hampshire University, University of Mount Olive, and Shaw University.

Perhaps Kelly is not deserving of bankruptcy relief, but denying her that relief will not get the taxpayers' money back. The Department of Education would be more honest with taxpayers if it allowed people in Kelly's position to shed their debt in a bankruptcy court and then took steps to prevent colleges all over the United States from enrolling students in programs that will never pay off financially.

But that will never happen because the colleges can't survive without federal student-aid money, including money they get from admitting students to programs that have no economic benefit for the people who complete them.

References

Kelly v. U.S. Department of Education, 548 B.R. 99 (Bankr. E.D.N.C. 2016).

Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015.

The Department of Education almost always fights bankruptcy relief for distressed college-loan borrowers--even when it pointless to do so: You'll never get out of this world alive.

I'll never get out of this world alive.

Hank Williams

Last July, Lynn Mahaffie, Deputy Secretary of Education, issued an insincere letter regarding the Department of Education's position concerning bankruptcy relief for college-loan debtors.

In that letter, Mahaffie outlined when DOE would not oppose bankruptcy relief for student-loan borrowers. She listed eleven factors to consider when determining when DOE would agree to permit a bankrupt debtor to discharge student loans in a bankruptcy court. Mahadffie said the Department would not oppose a bankruptcy discharge if it would not make economic sense to fight a student-loan borrower's petition for relief.

But in fact, Mahaffie wasn't telling the truth. Bankruptcy court opinions decided after Mahaffie wrote her letter show that DOE opposes bankruptcy relief for almost everyone--even when it is apparent a debtor will never repay his or her college loans.

Let's review Kelly v. U.S. Department of Education, decided less than two months ago. Cynthia Kelly, a woman in her sixties, filed for bankruptcy in August 2014. At the time of her filing, Kelly had accumulated $160,000 in college-loan debt; and she had had no steady employment for almost 10 years. In fact, she was receiving nearly $200 a month from the local Department of Social Services in food assistance.

Before filing, Kelly was approved for an "Income-Contingent Repayment Plan" (ICRP) that reduced her monthly student-loan payment obligation to zero because her income was so low. Based on her employment history, it seems highly unlikely that Kelly will ever be required to pay a single penny on her student loans under her ICRP because she will probably live at the poverty level for the rest of her life.

Nevertheless, the Department of Education opposed Kelly's bankruptcy application to discharge her student loans, and Judge David Warren, a North Carolina bankruptcy judge, refused to release her from the debt. In the judge's view, Kelly failed the second prong of the Brunner "undue hardship" test because she could not show "additional circumstances" that precluded her from paying back her loans in the future.

Indeed, Judge Warren was totally unsympathetic to Ms. Kelly's situation.  The judge pointed out that Kelly had taken out student loans over a period of 40 years and had paid almost none of it back (less than $2,300).  Moreover, she had left a secure job with a pharmaceutical company in 2004 to do community service work and had never had steady employment since that time. Although Kelly argued that she had made diligent efforts to find remunerative work, Judge Warren ruled that there was no evidence that she had ever "pounded the payment" to find a job.

Judge Warren pointed out that Kelly appeared to be in good health and was well educated, having a bachelor's degree, a master's degree, and a doctorate. He seemed offended by the fact that a highly educated person was getting food assistance.  Kelly's "lack of desire and motivation is an insult to those similarly situated," the judge observed, "especially to those lacking the gift of an education." In the judge's opinion, this insult was further compounded "by [Kelly's] complacent acceptance of welfare . . . "

I fully agree with Judge Warren that Kelly is not an attractive candidate for bankruptcy relief.  As the judge pointed out, Kelly took out student loans for nearly 40 years to obtain a lot of post-secondary education. Yet, she chose to live a "voluntary lifestyle" of community service rather than make reasonable efforts to maximize her income.

But let's face it. Ms. Kelly (or Dr. Kelly) will never pay off $160,000 in student loans. Her ICRP requires her to pay nothing due to her poverty-level income. It is totally unrealistic to believe that a woman in her sixties who hasn't held a steady job in ten years will obtain a well-paying job in today's economy.

Moreover, the colleges and universities that took Ms. Kelly's tuition money over a forty-year period bear a good deal of the blame for the situation Kelly is in now. According to Judge Warren, Kelly enrolled at multiple institutions, including Stone School, University of New Haven, Southern New Hampshire University, Spelman College, Drew University, South New Hampshire University, University of Mount Olive, and Shaw University.

Perhaps Kelly is not deserving of bankruptcy relief, but denying her that relief will not get the taxpayers' money back. The Department of Education would be more honest with taxpayers if it allowed people in Kelly's position to shed their debt in a bankruptcy court and then took steps to prevent colleges all over the United States from enrolling students in programs that will never pay off financially.

But that will never happen because the colleges can't survive without federal student-aid money, including money they get from admitting students to programs that have no economic benefit for the people who complete them.

References

Kelly v. U.S. Department of Education, 548 B.R. 99 (Bankr. E.D.N.C. 2016).

Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015.

Educational Credit Management Corporation v. Acosta-Conniff; A lifetime of Indebtedness is the future for most college borrowers

James Howard Kunstler wrote one of his best essays recently about America's opioid epidemic., and he began his essay with this observation:

 While the news waves groan with stories about "America's Opioid Epidemic," you may discern that there is little effort to actually understand what's behind it, namely the fact that life in the United States has become unspeakably depressing, empty, and purposeless for a large class of citizens.

Kunstler went on to describe life in small town and rural America: the empty store fronts, abandoned houses, neglected fields, and "the parasitical national chain stores like tumors at the edge of every town."

Kunstler also commented about people's physical appearance in backwater America: "prematurely old, fattened and sickened by bad food made to look and taste irresistible to con those sick in despair." And he also described how many people living in the forgotten America spend their time: "trash television, addictive computer games, and their own family melodramas concocted to give some narrative meaning to lives otherwise bereft of event or effort."

There are no jobs in flyover America. No wonder opioid addiction has become epidemic in the old American heartland. No wonder death rates are going up for working-class white Americans--spiked by suicide, alcohol and drug addiction.

I myself come from the desperate heartland Kunstler described. Anadarko, Oklahoma, county seat of Caddo County, made the news awhile back due to four youth suicides in quick succession--all accomplished with guns. Caddo County, shaped liked the state of Utah, can easily be spotted on the New York Times map showing where drug deaths are highest in the United States. Appalachia, Oklahoma, the Rio Grande Valley, and yes--Caddo County have the nation's highest death rates caused by drugs.

Why? Kunstler puts his finger on it: "These are the people who have suffered their economic and social roles in life to be stolen from them. They do not work at things that matter.They have no prospect for a better life . . . ."

Now here is the point I wish to make. These Americans, who now live in despair, once hoped for a better life. There was a spark of buoyancy and optimism in these people when they were young. They believed then--and were incessantly encouraged to believe--that education would improve their economic situation. If they just got a degree from an overpriced, dodgy for-profit college or a technical certificate from a mediocre trade school, or maybe just a bachelor's degree from the obscure liberal arts college down the road--they would spring into the middle class.

Postsecondary education, these pathetic fools believed, would deliver them into ranch-style homes, perhaps with a swimming pool in the backyard; into better automobiles, into intact and healthy families that would put their children into good schools.

And so these suckers took out student loans to pay for bogus educational experiences, often not knowing the interest rate on the money they borrowed or the payment terms. Without realizing it, they signed covenants not to sue--covenants written in type so small and expressed in language so obscure they did not realize they were signing away their right to sue for fraud even as they were being defrauded.

And a great many people who embarked on these quixotic educational adventures did not finish the educational programs they started, or they finished them and found the degrees or certificates they acquired did not lead to good jobs. So they stopped paying on their loans and were put into default.

And then the loan collectors arrived--reptilian agencies like Educational Credit Management Corporation or Navient Services.  The debt collectors added interest and penalties to the amount the poor saps borrowed, and all of a sudden, they owed twice what they borrowed, or maybe three times what they borrowed. Or maybe even four times what they borrowed.

Does this scenario--repeated millions of time across America over the last 25 years--drive people to despair? Does it drive them to drug addiction, to alcoholism, to suicide?

Of course not. And even if it does, who the hell cares?

References

James Howard Kunstler. The National Blues. Clusterfuck Nation, April 28, 2017.

Sarah Kaplan.'It has brought us to our knees': Small Okla. town reeling from suicide epidemic. Washington Post, January 25, 2016.

Natalie Kitroeff. Loan Monitor Is Accused of Ruthless Tactics on Student Debt. New York Times, January 1, 2014.

Gina Kolata and Sarah Cohen. Drug Overdoses Propel Rise in Mortality Rates of Young Whites. New York Times, January 16, 2016.

Vermont lawmakers urge Congress to lift bankruptcy restrictions for distressed college-loan borrowers: Bernie Sanders, here's your cue!

Earlier this week, the Vermont House of Representatives adopted a resolution urging Congress to allow distressed student-loan borrowers to file for bankruptcy without restriction. In effect, the Vermont lawmakers asked Congress to repeal the "undue hardship" provision of the Bankruptcy Code.

The measure had broad support among Vermont legislators.  The resolution was sponsored by more than 70 of  the Vermont House's 150 representatives.

This is an amazing development. Everyone knows the federal student loan program is in crisis and that millions of college-loan borrowers are burdened by massive debt they can't pay back. Congress won't do anything about it because our federal legislators have been bought off by the college industry and the banks. Now we have a state legislative body asking for bankruptcy relief.

Joint House Resolution 27, as the Vermont resolution is titled, is remarkable for its clarity.  As the resolution stated: "27 million borrowers are either in default or some other form of loan repayment delinquency . . . "  Moreover, the Vermont legislators pointed out, plans to reduce interest rates or restructure the student loan program might be helpful to future borrowers, but these proposals do nothing to help people who are suffering right now.

I hope other state legislatures across the United States will follow the lead of the Vermont House of Representatives and call for the elimination of bankruptcy restrictions for desperate college-loan borrowers.  Multiple state-level legislative resolutions would put huge pressure on Congress to quit doing the bidding of the college industry and amend the Bankruptcy Code.

And here is an opening for Bernie Sanders.  If he would endorse Joint House Resolution 27 and call for a reform of the Bankruptcy Code, he would attract even more voters.  At the very least, Bernie's endorsement might force Hillary Clinton to endorse Resolution 27 as well.  So far, her only plan for reforming the federal student loan program is to shovel more money toward the inefficient, corrupt, and venal higher education industry.

Hooray for the state legislators in Vermont.  Bernie, please jump on board. The time for action is now.

Vermont lawmakers urge Congress to lift restrictions on bankruptcy for student-loan borrowers

References

Micahel Bielawski. Vermont House asks Congress to let student-loan borrowers file for bankruptcy. VermongtWatchdog.org, May 3, 2016.  Accessible at http://watchdog.org/264079/legislature-requests-student-debt-relief-bankruptcy/

Tetzlaff v. Educational Credit Management Corporation: The Seventh Circuit made a mistake when it refused to discharge a quarter of a million dollars in student-loan debt owed by an umemployed 56-year old man living on his mother's Social Security check

The Seventh Circuit Court of Appeals got it wrong when it affirmed a lower court ruling against Mark Tetzlaff, an unemployed 56 year-old man who tried to discharge $260,000 of student-loan debt in bankruptcy. Mr. Tetzlaff filed a petition for certiorari in October with the U.S. Supreme Court, seeking to have the Seventh Circuit's decision overturned. I hope the Supreme Court agrees to hear his case.

The Seventh Circuit applied the Brunner test too harshly.

In ruling against Tetzlaff, the Seventh Circuit determined that requiring Tetzlaff to repay more than a quarter of a million dollars in student-loan debt would not cause him "undue hardship." To reach this bizarre conclusion, the court applied the three-part Brunner test, which required Tetzlaff to show:

1) [He could] not maintain, based on current income and expenses, a minimal standard of living . . . if forced to repay [his] loan;

 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period;

3) [he] made good faith efforts to repay the loans. 

 At the time Tetzlaff filed his adversary hearing, he was 56 years old, unemployed, and living with his mother. Both he and his mother subsisted entirely on his mother's Social Security check. Thus, the court admitted that Tetzlaff met the first prong of the Brunner test: he could not pay back his student loans and maintain a minimal standard of living.

But the Seventh Circuit panel ruled that Tetzlaff had not meet the second prong of the Brunner test.  According to the court,Tetzlaff was required to show "the certainty of hopelessness" concerning his financial future.  In essence, the court predicted that Tetzlaff's financial situation will probably improve. After all, the court noted, "he has an MBA, is a good writer, is intelligent, and family issues are largely over" (quoting the lower court's opinion).

Moreover, in the Seventh Circuit's view, Tetzlaff had not made good faith efforts to pay back his loans, a requirement of the Brunner test's third prong.

Although Tetzlaff may not have made sufficient efforts to repay the $260,000 he was trying to discharge in bankruptcy, he had also borrowed money to attend Florida Coastal Law School; and he had paid back his law school loans. Tetzlaff argued in court that his successful effort to pay off his law-school loans showed his good faith,

But the Seventh Circuit did not buy Tetzlaff's argument.  In the court's view, Tetzlaff had not made a good faith effort to repay the $260,000 he owed to Educational Credit Management Corporation, the agency that was fighting Tetzlaff's bankruptcy discharge. Thus he failed the third prong of the Brunner test.

Where the Seventh Circuit went wrong: Low Job Prospects for Law Graduates

In my view, the Seventh Circuit erred when it refused to discharge Tetzlaff's student loan debt. 

First of all, a 56-year old man who is unemployed and has significant mental health issues (as he testified in court) will never pay back more than a quarter of a million in student-loan debt--a debt that is growing larger by the day due to accrued interest. The court would have ruled more realistically and more compassionately if it had applied the principle laid down by the Ninth Circuit's Bankruptcy Appellate Panel in its 2013 Roth decision: "[T]he law does not require a party to engage in futile acts." 

It is true Tetzlaff holds an MBA and a law degree, but these credentials are no guarantee of a good job, particularly given his age, his employment history, and his mental health issues. In fact, Tetzlaff's law degree may be almost worthless.  

As Paul Campos wrote in his 2012 book, Don't Go To Law School (Unless), the job market for lawyers is terrible. Indeed, Campos observed, "[L]aw schools are now producing more than two graduates for every available job."

And Tetzlaff's prospects for a legal job are especially dire since he failed the bar exam twice. In addition, he graduated from Florida Coastal Law School, one of the nation's bottom-tier law schools with very low admissions standard. According to Law School Transparency, a public interest group, 50 percent of Florida Coastal's 2014 entering class were at extreme risk of failing the bar exam based on their LSAT scores.

Law School Transparency pointed out that graduates of law schools with low admission standards have a much harder time obtaining employment than graduates from more prestigious law schools. "Legal job rates are considerably worse at the serious risk schools," Law School Transparency's report stated. "A serious risk school is 4 times as likely to have a below average legal job rate. Nearly three-quarters of schools with employment rates below 50% were serious risk schools."

Law School Transparency's recent report shows that borrowing money to attend a law school with low admissions standards is not a good bet. "Based on available salary data from serious risk schools, graduates from these programs cannot service their debts without generous federal hardship programs."

Nevertheless, Tetzlaff was wise to pay off his law-school debt first, since the law school would not release his diploma to him unless he paid that debt. And without a diploma, he would be unable to take the bar exam. In fact, Tetzlaff had no real choice in prioritizing his law school debt over his other student loan debt.

It is truly unfortunate that the Seventh Circuit showed both lack of compassion and lack of understanding by penalizing Mr. Tetzlaff for making the only sensible financial decision he could make.  He simply had to make paying his law-school debt a priority in order to have any hope of ever practicing law.

The Court Should Not Have Allowed ECMC to accuse Tetzlaff of being a malingerer

Educational Credit Management Corporation, perhaps the nation's most heartless and ruthless student-loan debt collector, opposed the discharge of Tetzlaff's student-loan debt, and it hired Dr. Marc Ackerman, a forensic psychologist, to bolster its case. Ackerman performed tests on Tetzlaff and testified that Tetzlaff "'scored very high on several malingering scales,' indicting that Tetzlaff was perhaps feigning his psychological symptoms."

I find it outrageous that Educational Credit Management Corporation's hired a forensic psychologist as a means of suggesting Tetzlaff is a malingerer. ECMC has fought bankruptcy relief for distressed student-loan debtors all over the United States, and its chief executives have grown rich in the debt collection business. For ECMC to force an unemployed man in his mid-50s to take a psychological exam in a bankruptcy proceeding to determine whether he is a malinger is detestable.

It is true that Tetzlaff introduced testimony about his mental health issues, but I don't think that gives ECMC license to use an expert witness to essentially attack his character. In my opinion, the bankruptcy court should have excluded the forensic psychologist's opinion on the grounds of common decency.

And if we are going to be looking into people's mental health, let's check the mental health status of the ECMC officials who opposed bankruptcy relief for Jane Roth, a 68-year-old woman with chronic health problems who was living solely on the income of a $774 Social Security check. Anyone who would persecute Jane Roth must have serious mental health problems--let's call it chronic undifferentiated greed.

Conclusion: The  Seventh Circuit committed a grave error in deciding the Tetzlaff case

The Tetzlaff decision was a bad decision. Mr. Tetzlaff should be commended for trying to improve his economic prospects by obtaining graduate education, and he should not be penalized because some of his educational choices may have been misguided.

Mr. Tetzlaff probably made a mistake when he borrowed money to attend Florida Coastal Law School.  But he should not suffer a lifetime penalty for mistakes he made in his good faith efforts to obtain an education. And people in bankruptcy should not be required to take psychological tests to determine whether they are malingers.

The Department of Education needs to rein in Educational Credit Management Corporation by insisting that it not oppose bankruptcy relief for people like Mark Tetzlaff. Unless it does that, DOE simply cannot continue to say with any credibility that it is trying to relieve the distress of millions of people who are unable to pay back their student loans.

References

Paul Campos. Don't Go To Law School (Unless). Self-published, 2012.
Roth v Educational Credit Management Corp, 490 B.R. 908, 920 (9th Cir. BAP 2013).

Law School Transparency. 2015 State of Legal Education. Accessible at: http://lawschooltransparency.com/reform/projects/investigations/2015/
John Hechinger. Taxpayers Fund $454,000 Pay for Collector Chasing Student Loans. Bloomberg.com, May 15, 2013. Accessible at: http://www.bloomberg.com/news/2012-05-15/taxpayers-fund-454-000-pay-for-collector-chasing-student-loans.html
Tetzlaff v. Educational Credit Management Corporation, 794 F.3d 756 (7th Cir. 2015). Accesible at: http://scholar.google.com/scholar_case?case=900247726541956067&hl=en&as_sdt=6&as_vis=1&oi=scholarr

Old and in the Way: Hundreds of thousands of elderly student-loan debtors are experiencing real financial hardship, and the federal government doesn't care

Old and in the way, that's what I heard them say

They used to heed the words he said, but that was yesterday

Gold will turn to gray and youth will fade away

They'll never care about you, call you old and in the way

Old and In the Way

Lyrics and music by David Grisman

Many Americans think student-loan defaulters are young scofflaws who obtained valuable university degrees and simply refuse to pay back their loans.

But that stereotype could not be further from the truth.

In fact, most of the people who defaulted on their student loans simply fell on hard times. Many acquired their degrees from for-profit universities that charged far too much for substandard educational experiences. Millions of people who attended for-profit colleges found themselves worse off financially after finishing their studies than they were before they enrolled in these sleazy institutions.

Some people borrowed money to obtain undergraduate degrees and were unable to find jobs that paid well enough for them to service their loans. Some of these unfortunate souls doubled down and borrowed more money to go to graduate school.  Those who borrowed to go to law school found a collapsing job market for lawyers.

Other  student-loan borrowers became ill, got divorced or were laid off from their jobs. For a thousand different reasons, millions of student-loan debtors fell off the ladder in their climb toward economic security and never recovered. In short, most people who defaulted on their student loans simply did not have the financial resources to make their loan payments.

And many student-loan defaulters are elderly.

As Natalie Kitroeff reported recently in Bloomburg Business Week, about one out of four student-loan debtors age 65 and older are in default. Half the student loans held by people who are 75 years old or older are in default.  And 155,000 elderly Americans are having their Social Security checks garnished due to defaulted student loans, an enormous increase from 2002, when only 31,000 Americans were having their Social Security checks garnished.

Surely all humane people can agree that the federal government should not be garnishing elderly people's Social Security checks to collect on defaulted student loans. Or perhaps we can't. In the Lockhart decision, the U.S. Supreme Court upheld the government's authority to garnish the Social Security checks of student-loan defaulters. And get this: The decision was unanimous. There were no liberals on the Supreme Court on the day the Lockhart case was decided.

But perhaps humane people can at least agree that the government should not oppose bankruptcy relief for student-loan defaulters who are living on Social Security income of less than $800 a month. But again, perhaps we can't. Educational Credit Management Corporation actually opposed bankruptcy relief for Jane Roth, a 68-year-old woman with chronic health problems who was living on a monthly Social Security check of only$774.

Fortunately, the Ninth Circuit Bankruptcy Appellate Panel was considerably more compassionate than ECMC, and it discharged Roth's student loan debt.

I once thought the Roth decision might bring the federal government to its senses and that it would issue strict orders against opposing bankruptcy relief for student-loan defaulters living entirely off their Social Security checks. But I was wrong.

In fact the Obama administration is ignoring the Roth decision. The Department of Education issued a guidance letter in July 2015 (the Mahaffie letter) outlining when student-loan creditors should not oppose bankruptcy relief for insolvent college-loan borrowers; and it did not even mention the Roth decision.  And the Department of Education's lawyers filed a pleading in a California bankruptcy court last month arguing that the Roth decision is not binding on any bankruptcy court.

For all its blah-blah-blah about providing relief for distressed student-loan debtors, the Obama administration's Department of Education is doing little more than pitching long-term repayment plans whereby student-loan borrowers are forced to make loan payments for 20 or 25 years.

And DOE's lawyers run like hounds to the bankruptcy courts to oppose bankruptcy discharge for insolvent student loan debtors, regardless of their age.

In short, if you are an elderly person who defaulted on your student loans you have no friends in the Obama administration. As far as the President Obama's Department of Education is concerned, you are just old and in the way.


References

Natalie Kitroeff. Student Debt May Be the Next Crisis Facing Elderly Americans. Bloomberg Businessweek, December 18, 2015.  Accessible at:  http://www.bloomberg.com/news/articles/2015-12-18/student-debt-may-be-the-next-crisis-facing-elderly-americans

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

Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015. Accessible at: https://ifap.ed.gov/dpcletters/attachments/GEN1513.pdf

U.S. 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

U.S. Department of Education. Strengthening the Student Loan System to Better Protect All Borrowers.  Washington, D.C., October 1, 2015: Author. Accessible: http://www2.ed.gov/documents/press-releases/strengthening-student-loan-system.pdf