Cooking the Books: Federal Reserve Bank Says $166 Billion in Student Debt is Delinquent, But the Crisis is Worse Than That

Most Americans have confidence in what the Federal Reserve Bank says about the national economy. I know I do. But when the Federal Reserve Bank of New York reported that $166 billion in student debt is delinquent, it vastly understated the enormity of the student-loan crisis.

In its most recent quarterly household debt report, the Fed pegged total outstanding debt at $1.46 trillion as of the end of December. According to the Fed, about 11 percent of that debt ($166 billion) is delinquent or in default. That's a startling number. But the picture is far bleaker than that.

Just two months ago, Secretary of Education Betsy Devos stated publicly that only one out of four student borrowers (24 percent) are paying down the principal and interest on their loans. "As for FSA's portfolio today," DeVos said, "too many loans are either delinquent, in default, or are [in] plans on which students are paying so little, their loan balance continues to grow." In total, DeVos admitted, "43 percent of all loans are currently considered 'in distress,'" and 20 percent of all federal student loans are delinquent or in default.

DeVos also implicitly acknowledged that the federal government is cooking the books by classifying a lot of student debt as performing loans even though millions of people are not paying them back. "Only through government accounting is this student loan portfolio counted as anything but an asset embedded with significant risk," DeVos observed. "In the commercial world, no bank regulator would allow this portfolio to be valued at full, face value."

In addition to the millions of people who have defaulted on their loans, millions more are in various plans that allow borrowers to skip their loan payments without being counted as defaulters. As of last summer, 7.4 million people were enrolled in long-term income-based repayment plans who are making payments so low that interest continues to accrue on their loans.

Think about that: 7.4 million people whose loans are labeled as performing even though their loan balances get larger with each passing month. You can label that scenario any way you like, but we're talking about 7.4 million additional defaulters.

The Department of Education has been scamming the public for a quarter of a century regarding student-loan defaults. For years, it only reported the percentage of loans that defaulted within two years of entering repayment. To keep their default rates down, colleges encouraged their former students to enter into economic-hardship deferments, which excused them from making payments without officially putting them in default.

Then DOE began reporting three-year default rates, which showed defaults ticking up slightly to the neighborhood of 11 percent. But the Brookings Institute (in a paper written by Looney and Yannelis) reported in 2015 that the 5-year default rate for a recent cohort was 28 percent--more than double the three-year rate.

In other words, for a cohort of borrowers that the Brookings researchers analyzed, more than one out of four student borrowers was officially in default after five years. According to the same Brookings report, the five-year default rate for students who attended for-profit colleges was 47 percent--nearly half!

Of course, loan default rates vary some from cohort to cohort, but there is no sign that the percentage of student borrowers paying off their loans is going up. In fact, the data show the opposite.

In short, the Fed's recent report may be technically accurate but it understates the magnitude of the student-loan crisis. When the Department of Education finally comes clean and gives us some accurate figures, I think we will find that half of all outstanding student loans are not performing--about 20 million borrowers with collective debt totally three quarters of a trillion dollars.

 

Congressman Alcee Hastings introduces bill to abolish corporal punishment in schools, but the bill will go nowhere

Congressman Alcee Hastings, dean of the Florida congressional delegation, introduced a bill last month to abolish corporal punishment in the schools. Titled "Ending Corporal Punishment in Schools Act," the bill would cut off federal funding to any state that permits corporal punishment in the public schools.

Hastings, you may not remember, was once a federal judge. In 1989, Congress impeached him and removed him from the bench based on charges of bribery and lying under oath.

But that was 30 years ago; and, as the Psalmist observed, if God kept a record of all our sins, "who could stand?" Hastings' constituents must share that sentiment; they've sent Hastings to Congress for 25 years.

I hope Hastings' bill becomes law. Irrefutable evidence shows that beating children with sticks and boards is not good for them. Research has documented that African American students and children with disabilities get a disproportionate share of corporal punishment.

Moreover, all the leading child advocacy organizations and educational groups oppose the corporal punishment of children. Even the Catholic Church, which has a high tolerance for child rape, does not permit Catholic school administrators to paddle school kids.

Most states have abolished corporal punishment in their public schools.  Nineteen states still allow it, but the practice is mostly confined to rural communities in five Southern states: Alabama, Arkansas, Louisiana Mississippi, and Texas. Hastings' bill, if it becomes law, would wipe it out across the whole United States.

Hastings' bill, labeled H.R. 727, has six co-sponsors--all Democrats. Surely some House Republicans can step up to support H.R. 727.  On the Senate side, perhaps some lawmaker running for president might stop campaigning for a couple of moments and endorse Hastings' proposal to stop corporal punishment in the schools. Senators Harris, Warren, Booker, Gillibrand, and Klobuchar--are you listening?

But here is my prediction. No Republican congressperson will join Democratic colleagues as co-sponsors of  Hastings' bill. The bill will never get out of committee. In spite of the fact that Democrats control the House of Representatives, HR. 727 will never come to a vote on the House floor.

Our elected representatives are now so intent on destroying their political enemies, so obsessed with getting a few seconds of media attention, that they have forgotten that there are some simple and noncontroversial things they can do to make America a better country.

Dorothy Day, the great Catholic social justice activist, once had this to say about people's talk and people's deeds. "I have long since come to believe that people never mean half of what they say, and that it is best to disregard their talk and judge only their actions."

So, as the 2020 election season begins, let us judge all our braying politicians by what they have done, not by what they are saying. And if Representative Hastings gets a law passed to stop children from being assaulted in the schools, he will have redeemed himself in my mind for his misdeeds as a federal judge long ago.

Rep. Alcee Hastings (D-Fla.)

We are all peasants now: The student-loan crisis is destroying the middle class

As the world changed, we reverted to social divisions that we'd thought were obsolete.  . . . A plain majority of the townspeople were laborers now, whatever in life they had been before. Nobody called them peasants, but in effect that's what they'd become.

World Made By Hand

James Howard Kunstler 

American higher education is the emperor who wears no clothes. College leaders boast that our nation's universities are the envy of the world while they rake in so-called federal "student-aid" and parade about in medieval regalia peddling worthless degrees.

And America's young people are the losers. They've been gulled into thinking they can gain a middle-class lifestyle by getting a college degree and maybe a graduate degree as well. But millions are finding that their college degrees gained them little more than massive debt. And those online MBAs and doctorates they purchased with borrowed money--just junk.

According to the Federal Reserve Bank, outstanding student-loan debt reached $1.56 trillion last January. Around 45 million Americans have student-loan obligations and 7.4 million are enrolled in long-term repayment plans that stretch out for as long as a quarter of a century.  As Secretary of Education Betsy DeVos admitted with shocking candor last November, only one out of four student borrowers are paying off the principal and interest on their loans.

It is now well documented that student-loan debt is contributing to the nation's declining birth rates--now near a record low. People can't afford children because they're paying off student loans.

Young people can't afford to buy homes, they can't save for retirement, they can't pay off their debts.  Their liberal arts degrees, their shoddy law degrees, their fluffy MBAs and doctoral degrees qualify them to become baristas and clerical workers.

We are now in the early stages of the 2020 presidential election season, and what do our politicians talk about? Russia, border walls, free health care, and the Green New Deal.  We should be discussing the New Raw Deal--the deal our government and our universities have imposed on guileless young people.

For too long, Americans have bought the line that our colleges and universities operate for the public good and that the people who run them are wise and kindly. We particularly revere the ivy league colleges where we get nearly all our prune-faced Supreme Court justices and most of our presidents.

But if the folks who run Harvard are so goddamned wise, how could they have fallen for Elizabeth Warren's scam that she's a Cherokee? And if our elite college leaders are sensitive and kindly, how did little boys wind up getting raped in a Penn State shower room? And how could dozens of female athletes get groped by Larry Nasser while he was on Michigan State's payroll?

No, let's face the truth. Many American colleges and universities are not run by wise and kindly people; most are run by administrators who are primarily concerned with the bottom line. And far too often, higher education is not preparing young Americans to enter the middle class. On the contrary, by forcing people to take on oppressive levels of debt to get a college degree, colleges are setting up millions of Americans for a lifetime of peasantry.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Kinney v. National Collegiate Master Student Loan Trust: Iowa bankruptcy judge discharges student loans that a man cosigned for his niece

Anthony Kinney, a 52-year-old working guy with a modest job in the plastic industry, co-signed three student loans for his niece. His niece defaulted, and National Collegiate Master Student Trust I (probably an investment fund) began efforts to collect on two of the loans from Kinney.

Kinney filed for bankruptcy to discharge the loans, and he made two arguments. First, he argued that the Bankruptcy Code's "undue hardship" rule didn't apply to him because he only cosigned the loans and received no benefit from them. Second, Kinney maintained that paying back his niece's loans would be an undue hardship.

Bankruptcy Judge Thad Collins declined to rule on Kinney's first argument, but he agreed with Kinney that repaying the loans would be an undue hardship. In ruling for Kinney, Judge Collins interpreted "undue hardship" under the "totality of circumstances" standard, which is the standard used in the Eighth Circuit.

Judge Collins noted that Kinney made about $37,000 a year and was never likely to make more than $40,000. Moreover, Kinney had no financial resources other than his job, and his 401K retirement account only contained about $3,000.

Judge Collins also examined Kinney's living expenses, which he found to be reasonable and necessary. Kinney's resources were adequate to maintain a modest living standard, the Judge determined, but not enough to maintain a minimal standard of living if forced to pay his niece's student loans, which were accruing interest at  more than 12 percent. In addition, Kinney was living with an aunt and uncle while he went through bankruptcy, but this was a short-term solution to his housing needs. Kinney's future housing costs were definitely headed upward.

Judge Collins concluded his brief opinion by observing that Kinney was "in a very precarious financial situation," with no savings and minimal retirement funds. Having found that Kinney had no capacity to make loan payments, the Judge ruled that "requiring [Kinney] to repay either of the two loans . . . would result in undue hardship."

Judge Collins ended his opinion with a brief comment about the fact that Kinney was a cosigner of his niece's student loans. Although Kinney's cosigner status was legally insignificant to the Judge's undue hardship determination, Judge Collins found it relevant that Kinney received no educational benefit from his niece's student loans. In the Judge Collins' opinion, the lack of educational benefit weighed against Kinney's creditor.

Why is the Kinney case important? Two reasons:

First, the case illustrates the terrible consequences that people can face when they cosign a relative's student loans. The original lender probably didn't care whether Kinney's niece could pay back her loans because it knew that Kinney was also on the hook.

Second, Judge Collin's succinct decision went to the heart of the matter concerning student-loan debt. It was quite clear that Kinney would never be able to pay back his niece's student loans, which were accruing interest at 12 percent and which had nearly doubled in size since she originally borrowed the money.

Isn't ability to repay a student loan the only reasonable consideration when an overwhelmed student-loan debtor files for bankruptcy? And when it is clear that a college-loan borrower cannot repay his or her student loans, why not give that borrower the fresh start the bankruptcy courts were established to provide?

Thank God for bankruptcy judges like Judge Thad Collins. We need more judges like him.

Don't cosign a student loan!

References

Kinney v. National Collegiate Master Student Loan Trust I, 593 B.R. 618 (Bankr. N.D. Iowa 20180.

The great national shakedown: Student loans are dragging down both young and old

According to New York Times writer David Leonhardt, the Millennial generation is being "fleeced" by an economic system that favors the old over the young. For Millennials, Leonhardt points out, incomes are stagnant, and the wealth gap between Baby Boomers and younger Americans is growing.

"Given these trends," Leonhardt writes, "you'd think the government would be trying to help the young." But it is not doing that, Leonhardt argues. Instead government policy is making it harder for younger Americans to climb the economic ladder.

The biggest example of this myopic governmental policy, according to Leonhardt, is higher education. "Over the past decade, states have cut college funding by an average of 16 percent per student," Leonhardt writes, forcing students to borrow more and more money.

Of course Leonhardt is right. Burdensome student loans are making it more and more difficult for young Americans to buy homes and start families. Literally millions of Americans are not able to service their student-loan obligations and are being forced into long-term income-based repayment plans that can stretch out for two decades or even longer.

But we should be careful about characterizing the student-debt crisis as an outcome of inter-generational injustice because in fact Americans of all ages are being dragged down economically by student-loan debt. As a zerohedge.com writer observed recently:

Though millennials catch the most flack for taking out hundreds of thousands of dollars in student loans to pay for worthless college degrees that do little to improve their financial prospects in the "real world," for older Americans who take out loans to finance their education later in life, the repercussions can be ten times worse.

On average, the writer reported, student borrowers in their 60s owed almost $34,000 in student loans in 2017, up 44 percent in just seven years. About 200,000 people age 50 or older are having Social Security checks or other government payments garnished due to student-loan defaults. Total student-loan indebtedness by people in their 60s and older more than doubled in just seven years--from $33 billion in 2010 to $86 billion in 2017.

Most elderly college-loan borrowers accumulated debt to finance their own postsecondary studies but thousands of parents took out Parent Plus loans to finance their children's college education. According to Josh Mitchell of the Wall Street Journal, 330,00 Americans, representing 11 percent of Parent Plus borrowers, had gone at least a year without making a payment on their Parent Plus loans as of September 2015.

Insolvent older Americans have filed bankruptcy to discharge their massive student-loan debt, but the Department of Education and its contracted debt collectors almost always oppose bankruptcy relief. In a Kansas bankruptcy action, Educational Credit Management Corporation (ECMC) fought bankruptcy relief for Vicky Jo Metz, a 59-year-old woman who had borrowed about $17,000 to attend community college in the early 1990s and had seen her total debt quadruple in size due to accruing interest.

Put Ms. Metz in an income-based repayment plan (IDR), ECMC demanded. But a Kansas bankruptcy court disagreed.  If Metz entered into a 25-year IDR plan, the court observed, she would be 84 years old before her repayment obligations came to an end. Moreover, her debt would continue to grow even if she faithfully made her monthly loan payments for a quarter of a century. The judge sensibly forgave all the accumulated interest on Ms. Metz's debt, requiring her only to pay back the principal.

We should be careful about framing the student-loan crisis as a burden that falls mainly on the young. People of all ages are burdened by staggering levels of student-loan debt.  And it is the elderly who most merit relief.

Our government could implement some modest reforms to help relieve the suffering of older student-loan debtors. For example, Senators Elizabeth Warren and Clair McCaskill supported legislation to stop the garnishment of Social Security checks due to student-loan default.  And the Department of Education could stop opposing bankruptcy relief for older student-loan debtors like Ms. Metz.

As for me, I will support any candidate for the presidency who endorses substantive relief for the millions of Americans of all ages who have been fleeced by the federal student-loan program. In my view, free college in the future, which Senator Kamala Harris proposes, does not go nearly far enough toward reforming the federal student loan program--now totally out of control.

Kamala Harris, presidential candidate, promises cost-free college for most Americans. What will she do for millions of student debtors who are suffering right now?

Senator Kamala Harris (D. Cal.) is running for President, and she promises a free college education for most Americans if she gets elected.

How will that work? Back in 2017, Senator Harris and Senator Bernie Sanders (D-Vt) introduced legislation for free college, and here are the details:

• Attendance at a public institution will be free for families making $125,000 or less, which Harris claims will benefit about 80 percent of all Americans.

• The federal student-loan program will remain in place, but interest rates on loans will be slashed to less than 2 percent.

• Students from low-income families can attend private colleges and universities that serve "underrepresented minority communities" (she probably means HBCUs) at reduced tuition rates.

• The Harris-Sanders plan will also help students "afford books, housing, and transportation, and other fees." 

Free college! It's like bourbon flowing out of the office water cooler. Who could oppose that?

But here's the big problem with the Harris-Sanders proposal. Their plan would leave the current student-loan program in place.

The federal student-loan program is a colossal disaster, as Secretary of Education Betsy DeVos admitted last November; and it needs to be radically reformed.

Secretary DeVos said only 1 out of 4 student borrowers are paying down principal and interest on their loans, and 43 percent of outstanding federal loans are "in distress." The Harris-Sanders plan won't do anything to relieve the suffering of millions of Americans who are being crushed by student loans except cut interest rates.

In any event, Senator Harris's free college plan is never going to happen. It simply is not possible for the federal government to finance free college education to millions of Americans while we have $1.56 trillion in accumulated student loan debt--at least half of which will never be repaid.

However, there are specific things that Congress and our President can do to relieve the suffering of distressed student-loan borrowers, and I will support any presidential candidate who promises to "treat the wounded."

Two things need to be done:

1) Congress must eliminate the "undue hardship" language from the Bankruptcy Code so that overburdened college debtors can discharge their student loans in the bankruptcy courts.

2) The for-profit-college industry must be shut down.

Kamala Harris says she is "for the people." And in fact, she aggressively prosecuted Corinthian Colleges, a predatory for-profit college racket, when she was California's attorney general.  Her office obtained a billion dollar judgment against Corinthian, which filed for bankruptcy and shut down.

Very impressive!

Nevertheless, as a presidential candidate, Harris must continue to attack the sleazy for-profit industry. And she should endorse bankruptcy relief for millions of honest Americans who have been victimized by student loans.

Right now, Harris's higher education platform is nothing more than "Free beer tomorrow." Let's see if she proposes substantive reforms for the federal student-loan program and a serious crackdown on the for-profits.

Why is the Department of Education Sugar Coating Student Loans? Essay by Steve Rhode

By Steve Rhode (Originally posted at Get Out of Debt Guy on January 21, 2019)

I’d love to take credit for this observation but a reader sent me an email and said, “My granddaughter got this email. The Department of Education is marketing their product by saying “maximize the financial aid you may receive.” Nowhere in here does it use the word “loan.” Just the DOE looking for prey among uninformed young almost adults.”

The reader has a very good point.

The term “financial aid” certainly can have a different meaning than “student loan.”

For example, the Department of education also talks about free education benefits as financial aid. This includes educational awards, training vouchers, scholarships, military service aid, etc.

The government website says, “The U.S. Department of Education awards more than $120 billion a year in grants, work-study funds, and low-interest loans to more than 13 million students. Federal student aid covers such expenses as tuition and fees, room and board, books and supplies, and transportation. Aid also can help pay for other related expenses, such as a computer and dependent care. Thousands of schools across the country participate in the federal student aid programs; ask the schools you’re interested in whether they do!” – Source

And while the marketing hype from the government does say student loans, it also says low-interest which is also a bit of a sugar coat on reality.

While the interest rates are in the 5% to 7.6% range there is no warning that you will be easily eligible to borrow more than you may be able to afford to repay.

For once maybe I’m not blaming the Department of Education for poor rules and horrible service. This issue about talking factually about money for higher education permeates all of society from schools to parents to high school counselors.

I wonder if student loans were portrayed accurately instead of sweet frosted “financial aid” if the very people blamed for taking out excessive loans, the 18-year-olds, would get a real jolt?

Consider this. Instead of talking about access to financial aid, prospective students received a cigarette package like warning notice.

WARNING: This product may cause life long debt and keep you from saving for retirement or buying a house.

At the very least, what if borrowing money for college had a window sticker on it like when you purchase a car.

We want the borrower to be held responsible for taking out the loan so let’s give the borrowers the facts.

Fact 1: This is a loan. You will have to repay this loan with interest. The repayment cost of this loan will be more than the amount you borrow. It may be substantially more.

Fact 2: If you don’t finish school or obtain your degree you will still have to repay this loan.

Fact 3: The degree program you are enrolling in typically results in a salary of $X. This may be insufficient to be able to afford to repay the amount of money you are borrowing. Your chosen school has an X% graduation rate for this degree program.

Fact 4: Your obligation to repay your student loans may result in the reduced ability to save for retirement, purchase a home, or live on your own.

Fact 5: Failure to repay your federal student loans may result in a garnishment of your wages, forfeiture of any tax refund, and the garnishment of future Social Security payments.

The terms parents and schools use when freshman are headed to college don’t accurately reflect the financial reality of borrowing for education. If we want to blame borrowers then let’s give them the facts and not sugar coat it before they leap.

******

I highly recommend Mr. Rhode's blog site, getoutofdebtguy.org--a robust ongoing commentary on consumer debt issues.

Student-loan defaulters can lose their professional licenses in some states: America's 21st century equivalent of debtors' prisons

Americans may think the days of debtors’ prisons are over--those dark, dank jails where English magistrates tossed delinquent debtors in the 18th century. Read Charles Dickens' Pickwick Papers or Patrick O'Brian's Reverse of the Medal if you want the details.

But 21st century America is pretty damn close to 18th century England. Our government doesn't throw student-loan defaulters in debtors’ prison; but in 19 states, government agencies can seize professional licenses held by people who default on their student loans. According to the New York Times, lawyers, nurses, barbers, real estate agents, and psychologists have all had their licenses suspended or revoked because they defaulted on their college loans.

Millions of Americans have been beguiled by the promise of a bright future if only they get a college education. Perhaps they saw a for-profit college's advertisement on the subway--an advertisement depicting happy and prosperous individuals who got good jobs because they got a college degree.

And so they enroll. But they have to to take out student loans to pay for tuition and fees, and semester after semester their debt grows larger. And when they graduate (or drop out in discouragement) they often don't find good jobs.

Then, when these hapless student debtors are unable to make their monthly loan payments, the government's student-loan servicers cheerfully allow borrowers to defer their payment obligations while interest continues to accrue.

At some point, borrowers realize that they owe twice what they borrowed--even three times or four times what they borrowed. At that point their student loans are impossible to repay.

Then, when these unfortunate debtors default on their college loans, a cascade of misery showers down on them. The federal government garnishes their pay checks, seizes their income-tax refunds, and (for the elderly) even gobbles up a portion of their Social Security checks.

And--on top of all this--some states even seize defaulters' professional licenses, making it impossible for them to earn a living!

What have we become as a nation that we allow our most vulnerable young Americans (and some older Americans) to be scammed by the old canard that postsecondary education is the ticket to the middle class?

Let's see if one or two of the so-called progressives who seek the presidency will put license-suspension on their campaign agenda. Surely there is enough good will in Congress to pass federal legislation that prohibits the states from seizing people's professional licenses simply because they can't pay back their student loans.

And if Congress can't get that done, let's stop referring to our country as the Land of the Free and Home of the Brave. Because in fact, our nation treats student-loan debtors much like England treated delinquent debtors in the 18th century.

References

Jessica Silver-Greenberg, Stacy Cowley and Natalie Kitroeff. When Unpaid Student Loan bills Mean You Can No Longer Work. New York Times, November 17, 2017.

Steven Brint says American higher education Is doing great!: Pardon me Professor Brint, but what planet do you live on?

 Steven Brint, a professor at UC Riverside, wrote an essay for Chronicle of Higher Education titled "Is This Higher Education's Golden Age?" Brint didn't answer this question directly, but his article argues that American higher education is doing great.

Here's his evidence:

Lotsa money! Brint boasts that the demand for postsecondary education has remained steady in spite of rising tuition, which is true. Families are still willing to pay college tuition at nosebleed levels, at least at the elite colleges.  The most prestigious colleges continue packing in the suckers. A quarter million dollars for an Ivy League degree? Hey, no problem!

And, as Brint points out, the federal government is still higher education's sugar daddy. Brint notes that the feds shovel  $65 billion a year in Pell grants, work study, and tax benefits; and a lot of that money eventually winds up in college coffers.  Federal research money amounts to about $30 billion a year, Brint says; and the Department of Education pumps out  another $100 billion a year in student loans. And there's no sign the government will ever shut off the money spigot. So that's good news from Professor Brint's perspective.

More degrees! Brint also celebrates the rising number of college degrees. In 1970, American colleges produced 840,000 college graduates. In 2015, 1.9 million people received bachelor's degrees. Over that same time period, American higher education tripled its annual production of master's degrees and more than doubled the number of doctorates. In fact, in 2015, American universities dispensed more than three quarters of a million doctoral degrees.

That's certainly good news for the universities, their deans, and their professors. But graduate degrees have become insanely expensive, and it is now clear that a lot of people who got law degrees or MBA degrees from second-and third-tier universities were throwing their money away--not to mention the people who got master's degrees in the fine arts.

More professors! The United States is employing more college teachers than ever before, and Professor Brint thinks that's good news. In 2005, the nation employed 1.3 million postsecondary teachers. By 2015, the number had grown to 1.9 million--an increase of 300,000 professors and instructors in just ten years.

More research! And all those professors are doing more and more research. As Brint reports: "[T]he Web of Science indexed 12,000 journals, 160,000 conference proceedings in more than 250 disciplines, and reached a total count of 90 million records and more than a billion citations."

Professor Brint is the director of the Colleges & Universities 2000 Project at his home university and the author of a book about higher education. So we should presume, I suppose, that he knows what he's talking about.

But in fact, Brint's article is nonsense. Sure, higher education is doing great from the perspectives of the insiders: tenured professors and over-paid administrators. As Brint points out, the professors managed to eke out annual raises even during the recession of 2008 when millions of Americans lost their homes in foreclosure and millions more saw their retirement accounts deflate. Unlike most Americans, college professors enjoy lifetime employment, defined-benefit pensions, and gold-plated health insurance. Yes, for the professors, life is indeed beautiful.

But are we supposed to cheer because the Web of Science lists 12,000 journals and contains 90 million research documents? Have you read the titles of some of those articles and conference presentations?

I'm sorry, Professor Brint, but your insouciant boast about the value of research reminds me of that scene in the movie Out of Africa where Meryl Streep's character tries to convince a Kikuyu chief to allow the children in his village to be taught how to read.  The chief is skeptical. "The British know how to read," he pointed out, "and what good has it done them?"

The education research community has produced thousands of books, articles and scholarly presentations over the past 30 years on education topics. Are American kids better educated?

And the law schools turn out literally thousands of law-review articles every year. Do we have more justice?

I would like Professor Brint to think a moment about higher education's students--a constituency he said precious little about in his essay. Almost 45 million Americans owe on student loans. According to the Federal Reserve Bank, as of this month, total outstanding student-loan indebtedness has reached $1.56 trillion.

Secretary of Education Betsy DeVos gave a speech last November in which she reported that only 1 out of four student debtors (24 percent) are making payments on both principal and interest on their loans.  In fact, she acknowledged, 43 percent of all outstanding student loans are "distressed."

Although academia is a pleasant place for Professor Brint,the federal student-loan program is a train wreck. Millions of people have their loans in deferment, which means they aren't making loan payments while interest accrues on their loan balances. Another 7.4 million are in income-based repayment programs and are making monthly payments so small that their loans are negatively amortizing.

And the disastrous student-loan program is pulling down the small, nonprofit liberal arts colleges, especially in New England the Mid-Atlantic states and the upper Midwest. Legal education has been corrupted by the flow of student-loan money, with bottom-tier law schools turning out lawyers who can't find jobs.

And then there is the for-profit college industry, rife with corruption, fraud, and cronyism. Professor Brint said nothing about that problem.

So is higher education in a Golden Age, Professor Brint? I don't think so.

I close by noting that Professor Brint is a sociology professor. I was once told that sociology is nothing more than the painful enumeration of the obvious. But after reading Brint's essay, I would modify that observation. In fact, sociology is the painful enumeration of the oblivious.

Professor Steven Brint
Universities are stronger than ever?

Income-Based Repayment Plans for Student Debtors: Is Betsy DeVos a Slave Trafficker?

To my astonishment, Betsy DeVos, President Trump's Secretary of Education, publicly admitted that the federal student-loan program is a disaster. In a speech she gave last November, DeVos acknowledged that only 1 out of 4 student debtors (24 percent) is making loan payments that cover both principal and interest and that 43 percent of all student loans are in "distress."

Unfortunately, DeVos's Department of Education and its contracted debt collectors are making this crisis worse.  Probably 20 million Americans would be eligible to discharge their student loans in bankruptcy if these loans were treated like any other consumer debt (credit cards, auto loans, etc.) But the Bankruptcy Code's "undue hardship" rule, interpreted harshly by many bankruptcy judges, has pushed millions of distressed student-loan debtors into lifetimes of servitude.

Every few months, however, a bankruptcy judge rules compassionately and sensibly and discharges some student loan debt. There is now a good-sized body of cases that have ruled in student debtors' favor.

You would think the Department of Education would encourage this trend, which would hasten relief to millions of destitute student borrowers. If DOE would endorse the Seventh Circuit's ruling in Krieger, the Eighth Circuit Bankruptcy Appellate Panel's decision in Fern, the Sixth Circuit's ruling in Barrett, the Tenth Circuit's ruling in Polleys, and the Ninth Circuit Bankruptcy Appellate Court's ruling in Roth, we would be moving a big step forward toward granting debt relief to millions of honest but unfortunate student borrowers.

But that has not been what Betsy's DOE has done. DOE and its student-loan servicing companies (primarily Educational Credit Management Corporation) have fought bankruptcy relief in bankruptcy courts all over the United States.(The Roth, Myhre and Abney cases are particularly shocking).

And here's one current example. Vicky Jo Metz, a 59-year old woman, attempted to discharge her student loans in bankruptcy, and a sympathetic Kansas bankruptcy judge granted her a partial discharge. Metz had borrowed  $16,663  back in the early 1990s to attend community college but she was never able to pay off her student loans. In fact, she filed for bankruptcy relief more than once.

By the time she was in her late 50s, Metz's student -loan debt had grown to $67,000, because her loan balance continued to grow due to negative amortization.  Judge Robert Nugent concluded Metz could never pay back what she borrowed plus the accumulated interest, and he crafted a sensible and compassionate ruling. Judge Nugent forgave the accumulated interest on Metz's debt and ordered her to pay back the principal--$16,663.

That's a fair solution, and in my opinion, Judge Nugent's ruling was consistent with guidance from the Tenth Circuit Court of Appeals in the Polleys decision. (Metz's Kansas bankruptcy court is in the Tenth Circuit.) The Polleys ruling had instructed lower courts not to interpret the Bankruptcy Code's "undue hardship" provision in a way that would nullify the central purpose of bankruptcy, which is to give an honest debtor a "fresh start."

ECMC, DOE's chief pugilist in the bankruptcy courts, appealed Judge Nugent's decision. Metz should be placed in a long-term income-based repayment plan, ECMC argued, a plan that would require Metz to make monthly payments on her debt for as long as 25 years.

Judge Nugent had rejected ECMC's arguments in his court, pointing out that Metz would be 84 years old when her payment obligations ended. Moreover, Judge Nugent noted, Metz's debt would continue to grow because Metz's payments would not be large enough to cover accumulating interest. Judge Nugent calculated that Metz would owe $157,000 when her payment obligations ended--9 times what she borrowed back in the 1990s!

ECMC's arguments in Vicky Jo Metz's case are either deeply cynical or insane. Basically, ECMC, DOE's hired gun in this dispute, is asking a federal court to sentence Vicky Jo Metz to a lifetime of servitude--paying on a student-loan debt, which will grow bigger with each passing month.

In effect then, the Department of Education and ECMC are slave traffickers, condemning millions of Americans to repayment programs which can stretch over their entire lives.

In my view, the federal courts are poised to craft more compassionate standards for discharging student loans in bankruptcy, which would allow decent people like Ms. Metz to clear away debt they will never repay.  Unfortunately Betsy DeVos's Department of Education and ECMC are doing every thing they can to persuade the federal judiciary not to rule compassionately.

After all, there's a lot of money in the slave trade.

Cases

Abney v. U.S. Dept. of Educ. Corp.  (In re Abney), 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Barrett v. Educ. Credit Mgmt. Corp., (In re Barrett), 487 F.3d 353 (6th Cir. 2007).

Educ. Credit Mgmt. Corp. v. Polleys (In re Polleys), 356 F.3d 1302 (10th Cir. 2004).

Fern v. FedLoan Servicing (In re Fern), 553 B.R. 362 (Bankr. N.D. Iowa 2016), aff’d, 563 B.R. 1 (B.A.P. 8th Cir. 2017).

 Krieger v. Educ. Credit Mgmt. Corp., 713 F.3d 882 (6th Cir. 2013).

Metz v. Educ. Credit Mgmt. Corp., 589 B.R. 750 (Bankr. D. Kan. 2018), on appeal. 

Murray v. Educ. Credit Mgmt. Corp. (In re Murray), 563 B.R. 52 (Bankr. Kan. 2016), aff’d, No. 16-2838, 2017 WL 4222980 (D. Kan. Sept. 9, 2017).

Myhre v. U.S. Dep’t of Educ. (In re Myhre), 503 B.R. 698; 2013 (Bankr. W.D. Wis. 2013).

Roth v. Educ. Educ. Mgmt. Corp. (In re Roth), 490 B.R. 908 (B.A.P. 9th Cir. 2013).

References

DeVos, Betsy, Secretary of Educ., Prepared Remarks by U.S. Secretary of Education Betsy DeVos to Federal Student Aid’s Training Conferences (Nov. 27, 2018). Available at https://www.ed.gov/news/speeches/prepared-remarks-us-secretary-education-betsy-devos-federal-student-aids-training-conferencet.

Department of Education's Heightened Cash Monitoring List: Students should check to see if their college is in financial trouble

Steve Rhode performed a valuable public service last month when he published the U.S. Department of Education's most recent Heightened Cash Monitoring List.  This is DOE's list of schools that have various financial concerns, including accreditation problems or missing audits, as well as schools that are on financially shaky ground.

DOE does not make the list easy to review. I could discern no organizational pattern. Public schools, private nonprofits, proprietary schools, and foreign schools are all listed together. In total, there are more than 500 schools on the list.

Not surprisingly, more than half the schools with financial concerns are proprietary schools--a total of 275 for-profit institutions.  A good share of these schools are devoted to hairstyling or beauty. Forty-six schools on DOE's HCM list have the word Beauty or Cosmetology in their names; and there are three massage schools on the list.

The list also includes a large number of private, nonprofit colleges or universities: 128 schools in all. A fair number have religious affiliations. Seven schools on the list have the word Baptist in their name, and three school names include the word Wesleyan, indicating a Methodist affiliation.  Twelve colleges have the word Christian in their titles, and there were several other schools with names suggesting a religious connection: Bethel, Bethany, Bible, Seminary, etc.

DOE listed 35 foreign colleges and universities on its Heightened Cash Monitoring List. You might find it surprising that the federal government is funding foreign study at the same time the national parks are closed, but it does. Among the 35 foreign schools with various financial concerns are Hebrew University of Jerusalem, Universiteit Van Amsterdam in the Netherlands, University of Aukland in New Zealand, Centro De Estudios Universitarios Xochicalco in Mexico; and Poznan University of Medical Sciences in Poland.

DOE's list includes a category of schools with high student-loan default rates. Schools with a three-year default rate of 40 percent and schools that have a three-year default rate of at least 30 percent for three years are ineligible for federal student-aid money. 

Remarkably, none of the 500 plus schools on DOE's HCM list were flagged for having a high student-loan default rate. How could that be when Secretary of Education Betsy DeVos herself said that only 24 percent of student borrowers were paying down the principal and interest on their loans?

In my view, DOE's HCM list under reports the number of American colleges and schools that are in financial trouble. Nevertheless, the list is useful. 

First, the list confirms that a large number of small, private nonprofit colleges are in trouble, including many with religious ties. 

Second, we can see from the list that the largest share of financially troubled schools are for-profit institutions.

Finally, the list is a reminder that the U.S. Department of Education is loaning money for Americans to go to school overseas, which seems insane given the excess capacity in American higher education.

Of course not all schools on DOE's HCM list are experiencing serious financial problems. Some are on the list due to accrediting issues, inadequate administrative support, or audit irregularities. Nevertheless, all  postsecondary students should check the list to see if their school is on it. And parents who are helping their children decide where to go to college should also check the list. No one wants to enroll in a college that may close before the student graduates.

References

Rhode, Steve. Schools on the Warning List by the Department of Education--December 2018. Get Out of Debt Guy (blog), December 26, 2018.

Thanks to student loans, many Americans can't afford homes or children: Nice work, Congress!

Imagine if you will that you are sitting in the chambers of the U.S. House of Representatives in 1965 just before Congress adopts the Higher Education Act, which launched our nation's huge experiment with student loans.

Now imagine that the Ghost of the Future appears before the lawmakers just the way the Ghost of Christmas Future appeared to Ebenezer Scrooge in Dickens' Christmas Carol.

Before the vote, the Ghost issues this chilling warning: "Congress," the ghost whispers,"behold what will happen to this great nation if you launch a massive college loan program."

And this is the ghost's prediction:

First, within a half century, 45 million Americans will be burdened by student loans, which will amount to $1.5 trillion in outstanding indebtedness. Millions will be forced into 25-year repayment plans that are structured such that borrowers will never pay off their student loans--even if they make monthly payments for a quarter of a century.

Others will simply default on their loans--ruining their credit. By 2016, borrowers will be defaulting at the rate of 3,000 a day. Student-loan default rates will be much higher than default rates on mortgages, credit cards, or car loans.

Fueled by massive infusions of federal money, a corrupt and venal for-profit college industry will flourish, scamming millions of people--especially minorities, first-generation colleges students, and the poor.

A higher-education "arms race" will emerge, with colleges raising tuition to build luxury student housing, food courts, and recreational amenities like LSU's "Lazy River" water feature. Small, liberal arts college will shut their doors, unable to lure enough students who are willing to borrow $40,000 a year to attend a college no one has heard of.

Bad as these developments are, worse calamities will arise from an out-of-control student-loan program. As the Federal Reserve Bank of New York reported, home ownership will decline as young people are unable to save enough money to buy a house due to oppressive student-loan burdens.

And finally, the nation's fertility rate will nosedive so that birthrates aren't high enough to sustain the nation's current population. Fewer children means fewer young adults in the labor force, which means fewer working people to support a growing population of the elderly.

"Now," the Ghost from the Future asks Congress, "do you really want to pass the Higher Education Act of 1965?" Of course, the answer would be no. 

If you think my fictional Ghost from the Future is over-sensationalizing the student-loan crisis, then you should read Declining Fertility in America, written by Lyman Stone of the American Enterprise Institute. "Birth rates in America are declining," Stone writes, "leading to one of the lowest rates of population growth on record, soon to become the lowest ever" (p. 3).

This crisis, which has mass economic implications, is not about devaluing children, Stone argues. Rather it is about barriers to childbearing.  Among these barriers, Stone identifies the following (p. 3):

• Increased young adult debt service costs due to student loans;

• Decreasing young adult homeownership due to rapidly rising housing costs and student loans;

• Increasing years spent actively enrolled in education institutions, which tends to reduce birth rates dramatically while enrolled [italics inserted by me].

As Stone documents in his report, Americans are not having enough children to maintain our population--a population that is rapidly aging.

Their are several ramifications to the nation's plunging fertility rates. As Stone points out, a low fertility rate will put pressure on Social Security, Medicare and individual retirement accounts:

Without as many young workers to pay into Social Security and Medicare or buy the hot dogs and iPhone apps that make corporate shares worth holding, the retirement prospects for American workers will dim. Their 401(k)s will not be worth as much, they will have long lines at the hospital, and their Social Security checks will perhaps be smaller than they expected. In other words, in a low-fertility world, Americans may have to work longer and harder before retiring. (p. 6)

And much of this future suffering is due, as Stone asserts, to student loans.

Stone optimistically observes, that some barriers to childbearing, like student loans and housing costs, "may be readily addressed through various policy changes" (p. 3); but I am not so sure. In spite of all the suffering and hardship that student loans have unleashed on America's young people, we're really not talking much about the crisis, much less proposing solutions.

References

Rajashri Chakrabarti, Andrew Haughwout, Donghoon Lee, Joelle Scally, & Wilbert van der Klaauw. At the N.Y. Fed: Press Briefing on Household Borrowing with Close-Up on Student Debt. April 3, 2017.

Lyman Stone. Declining Fertility in America. American Enterprise Institute (December 2018).

A Ghost from the Future could have predicted the catastrophe caused by the student loan program.

Lord Abbett Affiliated v. Navient Corporation: "We cheat the other guy and pass the savings on to you!"

More than a year ago, Lord Abbett Affiliated Funds sued Navient Corporation for fraud and securities violations, claiming it was deceived by Navient's representations about its student loan portfolio. Navient is a student-loan servicing company that manages about $300 billion in student-loan debt owed by 12 million borrowers.

According to Lord Abbett's second amended complaint (80 pages long), Navient "regularly and indiscriminately" granted forbearances to struggling student-loan borrowers, allowing those borrowers to temporarily stop making monthly loan payments Lord Abbett alleged that Navient did this in order to artificially report high income and to hide the fact that Navient was a riskier investment than it was portraying itself (para. 5).

"By overusing forbearances," Lord Abbett represented, "Navient artificially kept delinquencies, defaults, and charge-offs lower than they should have been, which in turned allowed [Navient] to report artificially low loan loss provisions as well as correspondingly high net incomes and EPS [earnings per share]" (para. 7).

Navient's practice of misusing forbearances, Lord Abbett argued, enabled Navient to list thousands of loans as current (para. 38), even though those loans weren't performing.  Lord Abbett maintains that Navient's fraudulent practices, once disclosed, caused its stock price to fall. Undoubtedly, Lord Abbett and other investors lost a ton of money when Navient stock nosedived.

As I said, Lord Abbett's amended complaint was filed more than a year ago and its lawsuit may no longer be active.  Navient's stock has declined in value from its high and is now worth less than $9 per share. In fact, one investment analyst recently recommended loading up on Navient's stock, which pays a nice dividend.

Personally, I don't give a fig whether Lord Abbett and its investors lost money in Navient stock. After all, Lord Abbett apparently didn't care about Navient's nefarious practices so long as it was making money. It's as if Navient was making that old used-car dealer pitch: "We cheat the other guy and pass the savings on to you!"

Lord Abbott's complaint, however, is strong evidence that Navient's reckless practice of granting forbearances to distressed student borrowers obscures the number of people who are not paying back their student loans.  According to Lord Abbett (para 47), Navient granted four consecutive forbearances to more than half a million student-loan borrowers over a five-year period, allowing borrowers to skip their monthly loan payments while interest accrued and capitalized on their loans.

How many of these half million borrowers will ever pay off their individual student loans? I venture to say none of them will.

References

Lord Abbett Affiliated Fund v. Navient Corporation, Case No. 1-16-cv-112-GMS, Second Amended Complaint filed November 17, 2017 (D. Del.).

Here's Why You Should Buy Navient (NAVI) Right Now. Nasdaq.com, June 27, 2018).

We're checking our list! We're checking it twice! Has Navient been naughty? Chinnock v. Navient Corporation

Julie Anne Chinnock sued Navient Corporation, the U.S. Department of Education, and a Navient student-loan trust a few days ago, seeking two forms of relief. Ms. Chinnock wants compensation for an invasion of her privacy and a declaratory judgment that she does not owe Navient, DOE, or the trust any money.

As Chinnock said in her complaint, the controversy is quite simple and easy to resolve. "Defendants claim that they own certain student loans under which [Chinnock] is indebted to them, and [Chinnock] denies that defendants own such loans."

This case is reminiscent of the old robo-signing scandal during the home-mortgage crisis about ten years ago. Investors bought pools of home mortgages that were on the verge of default; but when the investors tried to foreclose on the homes, they couldn't prove they owned the underlying debt.

Apparently, Navient is in the business of packaging student loans into asset-backed securities and marketing them to investors. A lot of these student loans are going into default, but the buyers of those packaged loans are sometimes unable to show they have an ownership interest in the debt.

As Ms. Chinnock relates in her complaint, Navient is a bad actor:

Navient has a proven reputation for its predatory lending and collection practices. A 2014 Consumer Finance Protection Bureau Report found Navient's illegal loan servicing practices to include: (1) attempts to collect debts not owned by it; (2) unfounded negative threats (i.e. damage to borrower's credit), and (3) failing to correctly apply payments, among other predatory practices.

Ms. Chinnock also alleges that in 2017, "Navient was the most complained-about student loan company in all 50 states." She says that Navient was named in 530 federal lawsuits over a three-year period and that it was fined $97 million by the U.S. Justice Department for illegally charging students excessive interest rates.

Regarding her own complaint against Navient, Chinnock claims she paid off all her student loans in the amount of about $190,000 and was never delinquent on any of them (page 15 of her complaint). Nevertheless, in August 2018, Navient claimed she owed on eight additional loans totally several hundred thousand dollars.  Chinnock demanded proof that Navient's principals owned the loans, and Navient refused to provide any documentation.

Is this case a big deal? It is a VERY big deal. As Chinnock's lawsuit illustrates, lenders in the real estate industry and the student-loan business have gone to court to collect on debts they can't prove they own. Basically, they relied on a "take-my-word-for-it-loan-ownership ploy." For a while, the courts played along, allowing so-called lenders to get judgments against people who denied they owed anything.

But it is a basic principle of law that a creditor must prove ownership of a debt in order to get a judgment against a debtor. So far at least, Navient hasn't produced a shred of evidence that Julie Anne Chinnock owes it money.

If Ms. Chinnock wins her lawsuit, Navient should get ready for plenty more.

References

Julie Anne Chinnock v. Navient Corporation, Navient Solutions, Navient Student Loan Trust 2014-3, & the United States Department of Education, Case: 1:18-cv-02935. Verified Complaint (Ohio Ct. Common Pleas, Dec. 20, 2018).

LSU Football Player Kills a Man in Scotlandville: Will He Still Play in the Playstation Fiesta Bowl?

An LSU football player killed Kobe Johnson, an 18-year-old man, yesterday evening in Scotlandville.

This is what we know. Clyde Edwards-Helaire, an LSU running back, and Jared Small, a linebacker, were trying to sell an "electronic item" when Johnson allegedly tried to rob them. One of the players--police haven't said which one--shot Johnson multiple times and he died in the backseat of a late-model Chevrolet Silverado truck.

The LSU athletes called 911 and stayed at the scene until the police arrived. Joe Alleva, LSU's Vice Chancellor and Director of Athletics, called the incident "traumatic." Three lawyers showed up to represent Edwards-Helaire and Small, who claim self-defense.

As the Baton Rouge Advocate succinctly put it, there are "several unknowns about the incident."

First, the newspaper asked, which footballer player killed Johnson?

Second, what types of weapons were recovered and who owns them?

And finally--and most importantly--will Edwards-Helaire and Small suit up for the Playstation Fiesta Bowl on New Year's Day?

And I have a few questions of my own:

Who is paying the three lawyers who miraculously showed up to represent the football players? Perhaps LSU's Mr. Alleva knows the answer to that question.

Who owns the stylish pickup truck where Johnson bled to death?

And finally, was it necessary for the football player (Small or Edwards-Helaire) to shoot Johnson multiple times?

Of course all these questions are trivial when compared to what's at stake: The 2019 Playstation Fiesta Bowl, which is only a week away.  After all, how can we compare the life of an obscure kid from North Baton Rouge to the upcoming epic battle between the LSU Tigers and the University of Central Florida?

Surely football fans all over Louisiana are down on their knees in prayer. Please God, if an LSU football player killed someone on Saturday night, let it be Mr. Small, who is only a walk-on linebacker, and not Edwards-Helaire, who is a star running back who probably has a great career ahead of him if he goes pro.

Death scene (photo credit: Travis Spradling, Baton Rouge Advocate)

You should die before you pay off your student loans: Estate planning for elderly student-loan debtors

Steve Rhode posted an essay yesterday titled "Make Sure You Die Before Your Parent Plus and Federal Student Loans Are Forgiven." As Mr. Rhode explained, the federal government cancels all unpaid student loans owed by debtors who die before their loans are repaid. The cancelled debt is not a burden on the deceased debtor's estate.

On the other hand, people in 20- and 25-year income-based repayment plans (IBRPs) who receive loan forgiveness when they complete their repayment terms, will owe federal taxes on the amount of their forgiven loans. Why? Because the IRS considers a forgiven loan to be taxable income. If that tax bill comes due and the student-loan borrower can't pay it before dying, the unpaid tax becomes a claim on the decedent's estate.

"So," Mr. Rhode advises, "if you are older it may make more sense and cost less money overall if you extend out the repayment term past when you estimate you will die. When you pass, the student loan can pass with you."

Steve Rhode is absolutely right. You may think this is a technical detail of the student-loan program that only concerns a few people. But you would be wrong.

More than 7 million people are in IBRPs, and the number grows with each passing month. Nearly all these people will not have payed off their student loans before their repayment terms come to an end due to accruing interest. That means nearly all 7 million will receive tax bills when their accumulated student-loan debt is forgiven.

And these tax bills could be enormous. Remember Mike Meru, who borrowed $600,000 to go to dental school and is paying it back in an IBRP? The Wall Street Journal estimated that his debt would grow to $2 million by the time he completes his income-based repayment plan due to accruing, compound interest. That $2 million will be forgiven but it will also be taxable income for Dr. Meru.

It is true the IRS will not assess a forgiven-loan tax on people who are insolvent when their student loans are forgiven. But that's no comfort. How many people want to pay on student loans for 25 years and be insolvent on the day their loans are forgiven?

Of course there is a simple solution to this problem: Congress can pass legislation that would remove the tax liability  of people who complete IBRPs and have their student loans forgiven. In fact, this fix could probably be achieved through a federal regulation without Congressional action.

Alternatively, bankruptcy courts could simply discharge student-loan debt held by overburdened student-loan borrowers.  Some federal bankruptcy courts have concluded that IBRPs are not a feasible alternative to bankruptcy relief. They have countenanced the tax consequences of IBRPs, and some have recognized the enormous mental stress that debtors experience when they are burdened by student loans that can never be repaid. For example, the bankruptcy courts in the Fern case, the Martin case, and the Abney case have taken this sensible and compassionate view.

Perhaps Congress will do the right thing and fix this problem. After all, the Democrats will control the House of Representatives in January. If they were to present a bill to remove the tax consequences of forgiven student loans, what Republican would oppose it?

We shall see. In the Metz case, Judge Robert E. Nugent referred to an IBRP as a "pay-as-she-earns time bomb," and he is certainly correct. What a tragedy if this nasty time bomb goes off for millions of IBRP participants, when it could be so easily defused.

References

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

Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016), aff'd, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Fern v. FedLoan Servicing, 563 B.R. 1 (8th Cir. B.A.P. 2017).

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

Martin v. Great Lakes Higher Education Group and Educational Credit Management Corporation (In re Martin), 584 B.R. 886 (Bankr. N.D. Iowa 2018).

Josh Mitchell. Mike Meru Has $1 Million in Student Loans. How did That Happen? Wall Street Journal, May 25, 2018.

Steve Rhode, Make Sure You Die Before Your Parent Plus and Federal Student Loans Are Forgiven. Get Out of Debt Guy (blog), December 17, 2018.

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

The Remarkable Case of Vicky Jo Metz

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

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

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

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

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

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

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

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

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

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

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

Why the Metz Case is Important

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

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

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

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

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

Conclusion

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

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

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

References

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

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