Steve Rhode points out that wholesale forgiveness of student loans is impossible. Bankruptcy Relief for distressed college debtors is the best option

 Millions of words have been written about the student loan crisis. Heck, I've probably written a couple of million words about it myself. 

For my money, Steve Rhode's succinct and cogent essay, published yesterday, is the best analysis of this catastrophe. Mr. Rhode explains why massive student-loan forgiveness is a bad idea. Instead, he argues that bankruptcy relief is the better option. He also points out the fatal flaws in the federal student-loan program, which have brought us to the brink of calamity.

I urge you to read Steve Rhode's essay in its entirety.  My commentary will highlight a few key points.

First of all, Rhode points out that taking out student loans to pay for a college education was a mistake for millions of Americans. He cites a New York Life survey, which found that the average student-loan borrower took 18.5 years to pay off student loans, starting at age 26 and ending at 45.

That is a significant portion of life to have to be tied to a student loan payment that should have been directed to saving for retirement and then mushroomed into a giant nest egg. It can take decades to recover from that financial mistake. But that’s not the only financial regret people have.

Shockingly, millions of Americans took out student loans and never finished their degrees. For those people, student loans are a dead loss.  Instead of enhancing their economic future, dropouts shot themselves in the foot by taking out student loans.

Rhode also points out (as have many others) that the for-profit college industry has wreaked havoc among a population of Americans who took out student loans to attend for-profit schools. He cites a study by the Federal Reserve Bank of New York, which found that “[s]tudents who attend for-profit institutions take on more educational debt and are more likely to default on their student loans than those attending similarly selective public schools.”

The Federal Reserve Bank study then went on to say: "Overall, our results indicate that, on average, for-profit enrollment leads to worse student loan outcomes for students than enrolling in a public college or university, which is driven by higher loan takeup and worse labor market outcomes."

The federal student loan program is a mess. It is probably the worst public policy decision Congress ever made when it launched a program more than a half-century ago that now has more than 40 million people ensnared by a total of $1.7 trillion in outstanding student-loan debt.

But massive student-loan forgiveness is not a viable option. 

First of all, wiping out all that debt is fundamentally unfair. And here I will quote Steve Rhode's analysis:

As Howard Dvorkin, Chairman of  Debt.com said, “Only one-third of the people in this country get a four-year college education. The two-thirds without a college education is expected to subsidize their education when it is very likely that they earn less than the people who are receiving the educational subsidy.” 

As Mr. Dvorkin pointed out, “The issue of forgiving debt is complicated. What about all the people that have already struggled to pay their debts, and now other people get loans forgiven. That’s not fair.”

In any event, as Mr. Rhode explained, millions of people are already in a loan forgiveness plan. About 9 million people are in income-based repayment plans that allow them to make minimal loan payments that don't even cover accruing interest on their underlying debt.

So what is the solution to the train wreck we call the federal student-loan program? This is what Steve Rhode recommends:

I hate to state the obvious here, but rather than worry about the inequities of forgiveness and who wins and loses, the most rational and logical option is to roll back the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

It was this pernicious law that made even private student loans virtually nondischargeable in bankruptcy.  Many of the congresspeople who voted for this bill still hold elected office. They should be ashamed of themselves. 

Just as importantly, Mr. Rhode argues, Congress needs to remove the "undue hardship" language from the Bankruptcy Code and allow distressed debtors to discharge their college loans in bankruptcy like any other consumer debt.

Steve Rhode succinctly points out the merits of reasonable bankruptcy relief:

Returning to allowing both federal and private student loans to be discharged in bankruptcy has many features:

1.      It is a current and accepted legal process with clear rules and guidelines. 

2.      The debt is forgiven tax-free. 

3.      It allows people a chance to get a fresh start from an impossible situation. Oftentimes these issues are the result of accidents, injuries, medical issues, pandemics, etc. 

4.      A bankruptcy Trustee and Judge must review and approve the discharge plan. If a consumer has too much income for a full immediate discharge, they will be required to enter a five-year repayment plan in a Chapter 13 bankruptcy. 

5.      Forgiveness will be restricted to only those that qualify. 

6.      The fact the loans may now be dischargeable should force lenders to make better loan decisions before just handing the money to anybody. 

7.      If loans are less abundant or actually just based on repayment ability, then schools would have to ratchet back tuition fees. Less easy money would be available. 

8.      This process would be restricted to those who need and meet the accepted legal standards for bankruptcy. 

9.      People that can afford to repay their loans will have to do so through their Chapter 13 repayment plan.

10.  We can eliminate this ridiculous game and administration of student loans that will never be repaid and have to be dealt with.

As I said at the beginning of this commentary, I urge people to read Steve Rhode's article in its entirety. I agree with him completely.

Let's see what Congress does in the coming months. The way out of the nightmare is to amend the Bankruptcy Code.  Various student-loan forgiveness scenarios will not fix this enormous problem. 

If loan forgiveness is the best idea Congress has to offer, then our nation's political leaders will have opted for the status quo. And the status quo will ultimately destroy our nation's colleges and universities along with the lives of millions of student-loan debtors. 

Williams v. U.S. Department of Education: How does someone run up $400,000 in student-loan debt?

 In Greene v. U.S. Department of Education, Judge Richard Posner, a universally esteemed jurist, remarked that the criteria for determining "undue hardship" in student-loan bankruptcy cases are complex. Nevertheless, Judge Posner observed, "[t]he size of the debt is relevant--the larger it is, the more likely that imposing full liability on the debtor will produce an undue hardship . . ."

That makes perfect sense. Nevertheless, federal courts have refused to allow student-loan debtors to discharge their loans in bankruptcy even when the size of their college-loan debt is enormous and virtually impossible to pay off.

Williams v. U.S. Department of Education is a case in point. As the Seventh Circuit Court of Appeals explained, Williams began his college studies in 1982. "[O]ver the next three decades,[he] obtained a bachelor's degree in mathematics, a master's in communication, and a master's in business education." He financed these educational endeavors with student loans. By the time he filed for bankruptcy, he had run up $400,000 in student debt.

As the Seventh Circuit noted in its 2019 opinion, Williams had worked only part-time as a seasonal worker at a flower shop over the six previous years. His annual income was just $10,000.

After filing for bankruptcy, Williams entered into a 25-year, income-based repayment plan. Since his income was so low, he was required to pay nothing under that plan.

Williams tried to discharge this massive debt in an Illinois bankruptcy court, but he got nowhere. The bankruptcy judge refused to forgive his student loans, and the Seventh Circuit, in an opinion joined in by Judge Amy Barrett, affirmed the bankruptcy judge's decision.

Perhaps Mr. Williams was not the most attractive candidate for bankruptcy relief. As the Seventh Circuit pointed out: "If Williams continues what he has done for the last 6 years, which he concedes he can do, he need not pay anything on his debts for the next 25 years, at which point at least half the debt will be forgiven. That suggests no hardship."

Moreover, the Seventh Circuit continued, Williams had not provided any admissible evidence of a good-faith effort to repay his student loans.

Those efforts [ the appellate court observed] were virtually non-existent.  Despite his three degrees and his admitted ability to work full-time, he has worked only part-time in a floral shop for the last six years.  No admissible evidence explains the lack of higher-income work or why he has not, with about $3000 of annual net income, paid more than $140 toward lowering his debts.

I am not arguing that Williams should have gotten bankruptcy relief from his student loans. My point is simply this:  It is crazy for the federal government to issue student loans to an individual for three decades of college studies and then force that person into a 25-year repayment plan that allows him to pay nothing.

Surely we can all agree that this nutty system is unsustainable.

References

Greene v. U.S. Department of Education,  770 F.3d 667, 670 (7th Cir. 2015).

Williams v. U.S. Department of Education, 752 Fed.Appx. 363 (7th Cir. 2019).

The federal student loan program is nutty.

Hlady v. Educational Credit Management Corporation: Another Heartless Bankruptcy Judge Denies Relief to a Distressed Student-Loan Debtor

 Cherie Ann Hlady graduated from Hofstra Law School in 2006. She passed the New York bar exam and began practicing law. Unfortunately, Hlady could not make ends meet as a practicing lawyer. Ten years after getting her law degree, she filed for bankruptcy.

Hlady took out student loans totaling $40,000 to finance her legal education, a reasonable amount considering that she attended an expensive private law school. 

Sadly, Helady's solo law practice did not generate enough income to pay off her student debt.  Judge Louis Scarcella, who heard her case, noted that Hladly's net profit in 2016 was only $321. In the five years leading up to her bankruptcy, she had never made a profit of more than $17,691.

Meanwhile, interest on her student loans was accruing at an annual rate of 6.88 percent.  By 2017, Hlady's debt had grown to $140,000--more than three times what she borrowed.

Educational Credit Management Corporation (ECMC) held an interest in part of Hladly's student debt, and it opposed bankruptcy relief. ECMC told Judge Scarcella that Hlady was eligible for a 25-year, income-based repayment plan that would allow her to make monthly payments of zero due to her low income.

In Judge Scarcella's opinion, this fact--and this fact alone--was enough to make Hdlady ineligible to discharge her student loans in bankruptcy. "[I]t cannot be said that an obligation to pay $0 on the ECMC  Loan under the income-based repayment option would cause [Hlady] to fall below a minimum standard of living."

But wait a minute. Judge Scarcella admitted himself that Hladly's net income in 2016 was only $321. Doesn't that put her below a minimum standard of living?

Not in Judge Scarcella's view. Apparently, he was skeptical of some of the expenses that Hlady had listed on her federal income tax return. "Here," the judge wrote, "[Hlady] has not presented the Court with concrete evidence from which her current financial condition can, with any degree of certainty, be known."

Moreover, in the judge's opinion, Hlady had not shown that she could not increase her income in the future. Nor had she demonstrated that she handled her student loans in good faith. "[Hladys] unwillingness to be inconvenienced by having to report her annual income for the next 25 years does not provide sufficient justification to discharge her student loan obligation."

With all due respect, Judge Scarcella's reasoning is nutty. How can he say Hlady hadn't established that she cannot pay off her student loans while maintaining a minimum standard of living when ECMC itself concluded she was so broke that she didn't have to pay anything on her loans due to her low income?

How could the judge conclude that Hladly might someday pay off her student loans when the amount she initially borrowed had tripled since the time she graduated from law school? If Hlady could not pay off $40,000 in student loans over 14 years, how will she ever pay $140,000 over the next 25 years, especially since her loan balance grows by $20 a day in accruing interest?

As Judge Scarcella observed, Ms. Hlady is 48 years old. Her 25-year repayment plan will terminate when she is 73.  By that time, her loan balance will be more than a quarter of a million dollars.  This amount will be forgiven, but the forgiven debt will be taxed as income unless Hlady is insolvent at the time.

So what's the friggin' point?  

The point, obviously, is this. ECMC, as an agent of the federal government, does not want anyone to discharge student loan debt in bankruptcy. And, apparently, Judge Louis Scarcella feels precisely the same way.

References

Hlady v. Educational Credit Management Corporation, 616 B.R. 257 (Bkrtcry E.D.N.Y. 2020).

Parent Plus Loans: A despicable government program cruelly drives mom and pop into poverty so their kids can go to college

If you are not outraged by the federal government's Parent Plus student-loan program, you have a heart of stone.

According to The Hechinger Report, 3.5 million parents have taken out federal student loans to help their kids pay for college. Collectively, these parents owe almost $100 billion in outstanding debt, and about 12 percent have gone into default.

In other words, if you take out a Parent Plus loan to help finance your child's college education, you are running about a 1 in 8 chance of having your life ruined by debt you can't repay—pretty grim statistics.

Nevertheless, colleges and universities still offer Parent Plus loans as part of their individual student aid packages, and parents continue to take them out. Often parents do not realize that these loans are almost impossible to discharge in bankruptcy.  Even if mom and pop lose their jobs or are hit with significant hospital bills, they are still obligated to send Uncle Sam a monthly check.

The Hechinger Report tells the story of Jay and Tina Rife, who borrowed $40,000 so their son and daughter could attend public universities in Indiana. The loan balance has grown over 20 years, and they now owe $100,000. Their Parent Plus loan payment is bigger than their mortgage payment.

The Rifes' daughter, Stacy, is 41 years old and has her own student-loan payments. Meanwhile, Stacy's mother goes without health insurance so that she and her husband can make their Parent Plus payments.

The Hechinger Report quoted Amy Laitinen, a policy expert at New America, regarding Parent Plus loans.  "I don't think these loans should be presented with the financial aid offer at all," Laitinen said. "I think it speaks more to the school's desire to bring in the student than to what's best for the family . . . .To present [a Parent Plus Loan] as if it's really a way for paying for college when there's no way for those parents to pay it back is shameful and harmful."

Exactly. 

There is only one way to deal with this reprehensible government program, and it's a two-part response.  The Parent Plus program should be shut down immediately, and every parent who has been trapped by this despicable sham should be able to shed their Parent Plus debt in bankruptcy. 

Toilet-paper college degrees paid for with toilet-paper money: DOE's expert says taxpayers on hook for $400 million in student loans

 Our old friend, the U.S. Department of Education, released an internal report showing that the U.S. government will probably lose about $435 billion in unpaid student loans.  

As Josh Mitchell pointed out in a Wall Street Journal article, this amount approaches the amount of money private lenders lost during the 2008 home-mortgage fiasco.  Unlike 2008, however, the student-loan crisis will probably not trigger a financial meltdown.  The feds will simply borrow billions of new dollars to absorb the loss. The taxpayers won't even notice.

But I think the student-loan debacle is worse than DOE's internal report admits.  Nine million people are in long-term, income-based repayment plans (IBRPs), and almost all of them are not making monthly loan payments that are large enough to cover accruing interest on their underlying loans.  DOE's report estimates that IBRP borrowers will only pay off about half the amount of their loan balances. But the loss must be larger than that if the vast majority of people in these plans aren't paying down their loans.

Millions of people are taking out student loans to finance their college degrees--betting that their education will land them a good job. Too often, they lose the bet.

Meanwhile, people who skip college for a vocational school or an apprenticeship in the trades are making more money than college grads and aren't mired in student-loan debt. As Zero Hedge Fund put it, "there are plenty of hard working plumbers earning six-figures, who didn't take on a mountain of debt for a toilet-paper degree."

As conservative economists keep warning us, the Unites States will soon experience a spike in inflation unless the government stops printing money and running deficit budgets. When that occurs, students will have the bitter satisfaction of paying off their loans for toilet paper degrees with toilet-paper money. 

This is what hyperinflation looks like.

Joe Biden wants Congress to give all student borrowers $10,000 in debt relief: Too little? Too much?

 This week, Joe Biden called on Congress to give all student borrowers $10,000 in debt relief on their federal student loans.  "It should be done immediately," Biden said.

Senators Elizabeth Warren and Charles Schumer say Mr. Biden's plan is not bold enough. They want him to use his executive powers to give all student borrowers $50,000 in debt relief.  Senator Schumer said that relief of that magnitude would wipe out all federal student-loan debt for 75 percent of college borrowers and provide at least partial relief for 95 percent. 

So--is Biden's proposal too little or too much?

As I have said for years, a flawed relief plan is better than no relief plan. I support any congressional or presidential action that would grant some relief to the nation's 45 million student-loan debtors, who collectively owe $1.7 trillion in college loans. If $10,000 in debt relief is the only arrow in Mr. Biden's quiver, I say he should let it fly.

But both the Biden plan and the Warren-Schumer proposal are flawed. First of all, a $10,000 write-off of each individual's student debt will do almost nothing for the nearly 9 million borrowers in income-based repayment plans. Their debt grows larger by the day because the loan payments aren't large enough to pay off the accruing interest.

Moreover, Mr. Biden wants Congress to approve the deal, which will take weeks, if not months.  After all, the student-loan catastrophe is a political hot potato that Congress might not want to pick up.  

The Warren-Schumer proposal is far more comprehensive than Biden's. As Senator Schumer said, this would eliminate all (federal) student-loan debt for most Americans. But Warren and Schumer want Biden to take this action on his own hook.  Does he have the authority to forgiveness $50,000 in student loans for millions of debtors?  

Who knows?  Ultimately, a federal court would have to rule on that question.

As Senator Schumer averred, a $50,000 Christmas present would relieve most recent college graduates of all their federal student-loan obligations. For those folks, their college degree would turn out to be free--or almost free. That would make many young Americans very happy, and most of those who bothered to vote cast their ballots for Joe Biden.

But there are moral hazards to the Warren-Biden scheme that are not inconsequential.  I think it is a mistake to allow college graduates to walk away from their student loans while doing nothing to force the universities to bring their costs down. 

Giving a few million Americans a get-out-of-jail-free card on their student loans will only encourage the universities to continue charging too much for a college degree and perhaps even tempt them to raise prices further. What do tuition costs matter if the government is going to step in from time to time and give students a free ride on their loans? 

And once the feds step in once with a $50,000 bailout, students will get it into their heads that they will do it again. So why worry about those student loans? How will kids pay the rent on their luxury student housing?

No. It would be much better for Congress to pass legislation--with the next President's support--that would give distressed debtors easier access to the bankruptcy courts. Let the bankruptcy judges sort out who is really broke and deserves debt relief.

Regardless of what Congress or the next president does, the student-loan scandal will not be fixed overnight.  It is the huge friggin' elephant in the room that has blighted millions of Americans' lives.

But I think it would be a mistake for our national leaders to wipe out perhaps a trillion dollars of student debt and leave the taxpayers stuck with the bill. 

Americans have grown skeptical about the value of a college experience at universities mired in sexual-assault scandals (Penn State, UCLA, Baylor, Michigan State, LSU, etc.). They wonder why our elite schools harbor so many blowhard professors who teach students nothing more than most of them are victims of societal bigotry.

Ain't there at least some good things about American society--its culture, literature, democratic values, respect for human rights--some American virtues worth studying and nurturing?

If not--if America is in the toilet and worthy of nothing but contempt, why must students spend four or five years in college and borrow $50,000 or $60,000 to get a bachelor's degree in cynicism? Didn't they learn to be cynics in high school?

I'm in 12-step plan to swear off American politics: I vow never to watch or read any more political news--ever!

 I've known a few alcoholics over the course of my life, and several told me they were saved from destruction by Alcoholics Anonymous.  

I'm not an alcoholic, but I admit that I became addicted to politics during the recent presidential campaign.  I watched television news obsessively, and I worried about our country's future no matter who won the presidential election. My friends are divided politically, but almost everyone I know has been distressed by recent political events. I found we couldn't talk to each other about our concerns for fear of losing a friendship.

And then on Wednesday morning--the day after the election, I realized that I don't care who gets sworn into the office of the presidency in January.   I don't care who is appointed to cabinet positions, and I don't care who controls Congress.

Like a recovering alcoholic, I realized that I was powerless over the national political scene and that America--like the life of an alcoholic--has become unmanageable. Like a recovering alcoholic, I came to believe that only a Power greater than the American people can restore us to sanity.  

As an older white guy who lives in Louisiana, I now realize that our national politicians don't give a damn about the people who live in Flyover Country. 

They don't give a damn about the jobs that have been lost in the Midwest--the jobs that went to China.

They don't give a damn about the opioid epidemic that has swept through rural America.  

They don't give a damn about the strip mining destroying the heartland or the wind turbines that have turned the high plains into a vast junkyard. 

They don't give a damn about the spike in mortality rates among working-class Americans--rates fueled by drug overdoses and suicide.

They don't give a damn about the fact that American universities have become criminal rackets run by academic gangsters.

They don't give a damn about a global economy that is destroying the American middle class.

And you know what? I don't give a damn about the global elites who have turned our country into a moral cesspool.

So--I'm not going to read the friggin' New York Times, the friggin' New Yorker, or the friggin' Washington Post. I'm not going to watch the friggin' cable news shows or the friggin' Hollywood movies. I'm not going to read the friggin' op-ed essays in my local newspaper. 

Instead, I'm going to cultivate my garden, learn to hunt deer, and watch international movies on Amazon and Netflix like Far From Men, The Load, and Black '47. I'm going to root for the New Orleans Saints and read the sports page. I'm going to try to be a better husband, brother, and grandfather. I'm going to learn to smoke a better brisket. 

And I will continue trying to ease the burden of our nation's 45 million student-loan debtors, which is the only professional interest I still care about.

And I will continue to pray for the canonization of Dorothy Day, the greatest American Catholic of the twentieth century.  If we all aspired to live like Dorothy, our nation would be healed. I urge you to read her book, Loaves and Fishes, and you will see that I am right.

I have been on this new path for only about ten days, and so far, it feels pretty good.  Not great, but pretty good.

Servant of God Dorothy Day