Consumer Financial Protection Bureau v. National Collegiate Student Loan Trusts: A Window into the World of Private Student Loans

CFPB v. NCSLT: A Settlement is Scuttled

In 2017, the Consumer Financial Protection Bureau (CFPB) sued the National College Student Loan Trusts (NCSLT) and their debt collector, Transworld Systems, accusing the two defendants of illegal student-loan debt collection. Specifically, the CFPB accused NCSLT and Transworld of collecting on private student loans after the statute of limitations had expired and of suing debtors for unpaid student loans even though NCSLT could not prove it owned the debt.

CFPB and NCSLT  quickly entered into a settlement agreement subject to a federal court's approval. These are the essential terms of the settlement:

• National Collegiate and Transworld must conduct an independent audit of all 800,000 student loans in its various trusts.

• National Collegiate will stop trying to collect on student loans if it cannot prove it owns the debt.

• NCSLT will stop filing lawsuits on student loan debt after the statute of limitations has expired.

• NCSLT and its debt collecting agency will stop reporting negative credit information on borrowers that NCSLT improperly sued.

• NCST will stop filing false or improperly notarized legal documents.

• NCST will pay substantial monetary penalties.

Unfortunately for the litigants, Federal Judge Maryellen Noreika refused to approve the settlement because the parties involved did not have the authority to settle the lawsuit.

If this glitch gets worked out and the deal is finally approved, it could lead to $5 billion in debt relief for people who defaulted on private student loans. In the meantime, the lawsuit provides a window into the world of private student loans.

The Securitization of Private Student Loans

Most students finance their college education through government loans, and the total amount of outstanding federal student-loan debt is now $1.74 trillion. The private student-loan market is much smaller. According to Nerdwallet, college borrowers only owe about $125 billion in private student-loan debt.

Private banks and financial institutions (Sallie Mae, SoFi, Wells Fargo, etc.) issue student loans, but private lenders generally do not hold the loans on their books for very long. Instead, the loans are securitized. In other words, the loans are packaged and sold to investors as securities called student-loan asset-backed securities (SLABS). 

SLABS is attractive to institutional investors because they produce a reasonable return rate and are considered low risk. Historically, default rates have been lower for private student loans than federal loans because the banks usually require the student borrower to find a guarantor to co-sign a private student loan—often a parent or grandparent. Thus, if a student borrower defaults on a private loan, the lender can sue Mom or Granny. 

Also, student loans are difficult to discharge in bankruptcy because the same "undue hardship" standard that applies to federal loans also applies to private student loans.

Nevertheless, defaults on private student loans have shot up recently. National Collegiate Student Loan Trusts owns 800,000 private student loans. According to Bloomberg,  more than half of the principal on those loans was in default at the time of the proposed settlement between CFPB and NCSLT in 2017.

All these private student loans are managed by loan servicing companies, and when borrowers default, collection companies usually file suit on the creditors' behalf in a state court. In recent years, there have been thousands of lawsuits filed against private student-loan defaulters all over the United States. Transworld Systems alone has filed 38,000 debt-collection lawsuits.

Unfortunately for the creditors (the owners of the SLABS), statutes of limitation apply to collection efforts on private debt. Unless the creditor sues before the statutory limitation period expires, it cannot legally recover on student loans in default.

Moreover, the SLABS owners must prove they own the debt. In some cases, creditors have gone to court and found themselves unable to produce the paperwork that shows they are the legal owners of the debt they are trying to collect. 

Why is CFPB v NCSLT important?

If you've seen the movie The Big Short, you know that the financial crisis of 2008 was triggered by a wave of defaults on home mortgages. Financial institutions had bundled thousands of home loans into securities call ABS (asset-backed securities), which were represented as being low-risk investments.  

In fact, many of the underlying mortgages were subprime loans on homes that had been overvalued. When the housing market collapsed in 2008, millions of homeowners defaulted on their mortgages, and the ABS investors lost tons of money. 

Also, when creditors sued the defaulting homeowners, they often could not prove they owned the debt. A lot of the paperwork on these mortgages had been "robo-signed" and improperly notarized. In many instances, the courts refused to hold defaulting homeowners liable on their home loans.

Something like that is happening now in the private student-loan market. People who have private student loans are defaulting at a surprisingly high rate. Creditors are filing suit against defaulters but often cannot show they own the debt. In some instances, paperwork has been improperly"robo-signed," causing some judges to rule in favor of debtors. 

Financial commentators have warned for years that the student-loan program is in a bubble, much like the housing bubble of 2008, and that a major financial crisis in the student-loan industry is on the horizon. The coronavirus has put millions of Americans out of work, leaving them unable to make monthly payments on their federal and private student loans. In other words, the bubble may be about to burst.  

What this means is hard to say. In the private student-loan market, investors in SLABS will undoubtedly lose money, but the federal government holds more than 90 percent of all student loans. The Department of Education can maintain the status quo in the short term by merely continuing to issue student loans as it has for the past 50 years. But even Education Secretary Betsy DeVos admitted publicly in 2018 that only a minority of student borrowers are current on their loans.

Presumptive Democratic Presidential nominee Joe Biden has proposed forgiving all federal student debt acquired to attend public colleges. But a more straightforward way to deal with this massive debt crisis is to allow insolvent student-loan debtors to discharge their debt in the bankruptcy courts.

Education Secretary Betsy DeVos: What, Me Worry?

Don't go hating on Tulsa just because President Trump willl speak there in a few hours

President Donald Trump will hold a rally in Tulsa this evening, his first rally since the coronavirus pandemic descended on the United States.

Trump's media critics often mention the fact that Tulsa is the site of one of America's worst race riots. Indeed, on June 1, 1921, white rioters rampaged through Tulsa's Greenwood District, an affluent African American neighborhood, and destroyed or damaged more than 1,000 homes and businesses. Between 100 and 300 people were killed, and 6,000 African Americans were interned by law enforcement authorities. The Tulsa race massacre may, in fact, have been the worst race riot in American history.

Trump's media enemies insinuate that Trump picked Tulsa for his first post-coronavirus rally because he is a racist, and he finds Tulsa's history of racist violence appealing.  But to say such a thing, or even to imply it, is a slander on Tulsa, one of MidAmerica's most charming and lovely cities.

Tulsa was transformed during eastern Oklahoma's oil boom of the 1920s and 1930s, which brought enormous wealth to the city and a construction boom. As anyone knows who has visited Tulsa, the city is the home of an extensive collection of Art Deco buildings. It is truly a museum of early twentieth-century architecture.

Oil wealth also made possible the establishment of two nationally acclaimed museums: The Philbrook and the Gilcrease. The Philbrook Museum is located in what was once the home of oil magnate Waite Phillip and his wife Genevieve and contains an impressive and eclectic collection of art.

The Gilcrease Museum houses perhaps the world's most extensive collection of western American art. Thomas Gilcrease, another oil magnate, donated his own art collection to form the foundation of the museum's treasurers. Born of a mixed-race family (Scotch-Irish, French, and Creek), Gilcrease was enrolled in the Creek tribe when he was nine years old.

And Tulsa has other cultural treasures. The Bob Dylan papers and the Woodie Guthrie papers are housed in the city.  Both collections were purchased by the George Kaiser Foundation.

Over the years, Tulsa has been the home of countless famous actors, sports figures, and musicians. Tony Randall--part of The Odd Couple, is from Tulsa, along with Time Blake Nelson, the actor, screenwriter, and movie director.

Tim Blake Nelson deserves special mention. He is best know for his role in Brother Where Art Thou, but he also directed The Grey Zone, perhaps the best movie ever made about the Holocaust.

Before closing my paean to Tulsa, I must also mention that Tulsa is the home of Cain's Ballroom, where Bob Wills and the Texas Playboys performed both live and on the radio during the 1930s. Cain's Ballroom helped popularize a new form of American music that blended classic swing with western themes and melodies. Even today, Cain's Ballroom is known as the Carnegie Hall of western swing.

Why am I going on so long about Tulsa?  Perhaps it is because I grew up in rural Oklahoma and always considered Tulsa as Oklahoma's most beautiful, gracious, and culturally rich city.  I still feel that way. So--whatever happens tonight at the Trump rally, please don't let the evening's events tarnish one of the great cities of America's flyover country.

Bob Wills and Texas Playboys performed in Cain's Ballroom in Tulsa, Oklahoma.

Two LSU professors say they will refuse to teach incoming freshman who used the "n" word in a video: I disagree

Once upon a time, colleges and schools had the job of inculcating civic virtues in their students: to introduce them to the marketplace of ideas, to think objectively and rationally, to be tolerant of others, and to appreciate diverse values and cultures.

But maybe those days are past. According to some academics, incoming students should be vetted to make sure they already have a particular set of values.  If they don't have those values before enrolling, they should be refused admission.

That seems to be the view of two professors at Louisiana State University who vow not to teach an incoming freshman should he try to enroll in their classes. Why? Because the poor sap used the "n" word in a video that became widely publicized.

I think they are wrong to take that position.

Don't misunderstand me. I abhor racist speech and racist sentiments. The young person who used that word acted wrongly. But how will a public university inculcate better values if it refuses to admit someone intolerant or wrongheaded on issues of race?

I'm retired, but I would not refuse to teach this student. If he took my class on higher education law, he would be exposed to some of the famous civil rights cases of the U.S. Supreme Court: Sweatt v. Painter, Brown v. Board of Education, and Grutter v. Bollinger. If he were a student in my classroom, he would be learning about American law in a multicultural environment because a significant percentage of my students are African Americans.

The two professors say they will drop students from their classes who have a record of engaging in hate speech.  Allysa Johnson is an assistant professor in the Department of  Biological Sciences.  William Doerrler is an associate professor in the same department.  

Both professors are widely published, and I'm guessing that students who take their classes will be exposed to the fascinating and broadly useful research in the biological sciences.  Professor Johnson specializes in the genetic causes of age-related degenerative diseases.  Professor Doerrler researches in the area of bacterial resistance to antibiotics--a critical medical issue.

I do not know anything about the student whom Professors Johnson and Doerrler want to bar from their classrooms. Perhaps the student is an avowed racist with no interest in biology. On the other hand, the misguided kid might make an enormous contribution to American society, were to be admitted to LSU and have his mind opened to new ways of thinking by LSU's eminent faculty.

In my view, refusing to admit a student to a public university classroom because of unfortunate remarks the student made before coming on campus undermines the core mission of a university--which is to nurture and stimulate minds---to help students to become better people.

LSU removes Middleton's name from university library--good. But let's expose all the famous bigots in American higher education--including the ones at Harvard, Stanford, and M.I.T.

Louisiana State University announced that it is changing the name of the university's main library. The library was named after Troy H. Middleton, a genuine hero of World War II and L.S.U.'s president from 1951 to 1962. Unfortunately, by present-day standards, Mr. Middleton was a racist. Mr. Middleton was a bit like Nicholas II, Russia's last czar, who didn't get the memo from the Bolsheviks.

L.S.U.'s current interim president, Tom Galligan, explained the reasons for the change. "Our goal is to erase symbols of things that exemplify a racist past," Galligan stated.

Any student, or particularly a student of color, that has to go into any building which bears the name of someone not identified with progress and [instead] with racist traditions is to inhibit their education. They won't feel safe in that building.

President Galligan is right. It is simply unacceptable to require African Americans to study in buildings that were named after prominent racists.  But I think America's education leaders should widen their examination of our nation's chauvinistic past and expose all famous people in American history who were prejudiced against not only African Americans but Catholics and eastern Europeans as well.

As Thomas Leonard revealed in his book Illiberal Reformers, almost all American intellectuals and political leaders in the late nineteenth and early twentieth centuries were eugenicists. By definition, these people supported efforts to reduce so-called inferior racial strains from America's predominately white, Anglo-Saxon population.

Francis A. Walker, president of M.I.T. (1881-1897), was a eugenicist who was prejudiced against eastern and southern Europeans. Anderson Dixon White, president of Cornell  University(1866-1885), portrayed European immigrants as barbarian invaders. David Starr Jordan, president of Stanford from 1891 to 1913, held similar views.

Moreover, American intellectuals during this period were almost universally prejudiced against Catholics. For example, Christopher Columbus Langdell, Dean of Harvard Law School (1870-1895), refused to admit graduates from Catholic colleges to Harvard Law School.

Harvard's president, Charles William Eliot, supported Langdell's bigoted policy, claiming it was based on the inferior quality of Catholic colleges and not prejudice. Was President Eliot himself an anti-Catholic bigot?  You bet. On a trip to Europe in the mid-1860s, he wrote: "I hate Catholicism as I do poison, and all the pomp and power of the Church is depressing and mortifying me."

Racial and religious prejudice among American intellectuals during the Progressive era is well documented, and yet we are not renaming buildings that were named after prominent bigots.  Harvard's law library is still named after Dean Langdell.  Stanford still has a campus building named after David Starr Jordan. Walker Memorial at M.I.T. still honors its eugenicist president.

So here is my plea to American higher education. Yes, scrub the names of racists from campus buildings. But don't settle for outing Confederates and relatively obscure guys like Mr. Middleton.  Change the names of buildings that honor prominent eugenicists and religious bigots, including the buildings at Stanford, Cornell, Harvard, and M.I.T.

That's a big job, so you better get started.

Christopher Columbus Langdell: Bigot-in-Chief at Harvard Law School (1870-1895)

Christopher Columbus statue beheaded in Boston. The morons are out of control.

Poor Christopher Columbus. He wasn't woke, and he paid the price.

Over the last few days, protesters pulled down Chris's statue in Richmond and dumped it into a lake. And in Boston, vandals beheaded a likeness of Chris located in Boston's North End.

What did Mr. Columbus do to deserve these indignities? He discovered America--the racist son of a bitch.  And by introducing Europeans to the Western Hemisphere, he ushered in a long era of oppression against the Native population and against Blacks.

OK, we get that. But what are we supposed to do now--all the descendants of privileged Europeans? Go back where we came from? If we did that, who would patronize the Indian casinos?

Of course, I'm being sarcastic. But on a more serious level, I am offended by the morons who vandalize statues of Christopher Columbus. They obviously aren't aware that Columbus symbolizes Catholic contributions to American history.

In the late nineteenth century, American Catholics were still being discriminated against, especially in New England. Protestants were forming men's civic organizations partly to establish life insurance funds for their members. But Catholics were not permitted to join these groups.

Father Michael McGivney, pastor of St. Mary's Church in New Haven, Connecticut, organized a small group of Catholic laymen to provide life insurance for Catholic working men.  One of the members suggested a name for the organization: the Knights of Columbus.

Over time, the Knights evolved from being merely an insurance company to becoming a militant organization devoted to stamping out anti-Catholic bigotry in the United States. It was the Knights who led the movement to recognize Columbus Day as a national holiday, and it was the Knights who fought the Ku Klux Klan during the 1920s when the KKK was primarily an anti-Catholic terrorist organization.

By the early twentieth century, Christopher Columbus came to symbolize Catholic contributions to American history. He was especially dear to Italian Catholics because Columbus was Italian.  It is no accident that Columbus's statue in Boston is located in the North End--which is Boston's Little Italy.

Although the vandals may not know it, their lawless acts are microaggressions (don't you love that word?) against Catholics and ethnic Catholics in particular. When they deface a statue of Columbus, they dishonor millions of Catholic Americans, and they demonstrate their woeful ignorance of American history.

*****

Note: I am aware that strictly speaking, Columbus did not "discover" America.  Scandanavians were probably the first Europeans to explore North America. More to the point, archeologists theorize that the first people to settle the Western Hemisphere came from Siberia via the Bering Land Bridge.

Rather than defund the police, let's scrap those armored personnel carriers

George Floyd's death is a tragedy. Police violence toward black men is intolerable and must stop.

So what do we do? Black Lives Matter call for defunding urban police departments, an argument that has a certain appeal. No doubt about it, we could eliminate police violence if we got rid of the police.

But most Americans are opposed to that idea. If we get rid of the cops, critics say, the bad guys will steal our stuff.

Personally, I'm not that worried about people stealing my stuff. Why? Because I have absolutely nothing that anyone would want to take.  

I have a smart TV, but my grandkids tell me that it is not nearly smart enough, and I doubt anyone would burglarize my house to take it. I have hundreds of books on Catholic history and literature, but would anyone want to steal them? Doubtful. As for my Mr. Coffee coffeemaker, please swipe it before I throw it out. 

Here's a better idea for reforming American police departments than merely shutting them down.  Why not take away all their military hardware, including their Army-surplus armored personnel carriers?

According to the New York Times, the U.S. military gave hundreds of tons of military equipment to American police departments between 2006 and 2014, including 432 mine-resistant, ambush-proof armored vehicles (MRAPs) and 93,000 machine guns. 

Police officials say they need military hardware in an era of escalating violence. "I don't like it. I wish it were the way it was when I was a kid," one police chief said.  Nevertheless, "We're not going to go out there as Officer Friendly with no body armor and just a handgun and say 'Good enough.'"

Let's face facts. Over the past 30 years or so, our urban police departments have begun to resemble South American paramilitary units. Surely this transformation from "Officer Friendly" to black-mask wearing SWAT teams has made minority communities more afraid of the police.

And this creeping militarization began long before President Trump took office. The New York Times article I referenced was published when Barack Obama was in office. 

Police officers rightly argue that they occasionally need armored vehicles to deal with riots, looting, and homicidal maniacs. And I sympathize with that view. After all, hundreds of police officers were injured during the George Floyd riots.  If someone is going to throw a brick at me, I would much rather be inside an MRAP truck than standing on the street with only a plastic shield to protect me from the mob.

So I propose a compromise.  The police will stop killing black men in their custody.  The minority community will stop setting fire to their neighborhoods. And the police departments will scrap their armored trucks and give their machine guns back to the Army.

You think such a deal might be arranged?

MRAPS BY STATE

WA

ME

432

= 1 vehicle

ND

MT

George Floyd protests and NYC curfew arrests: Civil disobedience works great in a humane society

Two nights ago, George Floyd protesters tried a new tactic in New York City. Thousands of peaceful demonstrators remained on the streets after the curfew went into effect, and NYC cops arrested about 180 of them. No one resisted. All the detained protestors passively submitted to being hauled off to jail.

Passive resistance is an excellent tool for opposing injustice. Mahatma Gandhi used it and drove the British out of India. Martin Luther King preached the doctrine of nonviolent protest and galvanized the civil rights movement. Rosa Parks refused to sit in the back of the bus, and she ultimately saw the end of segregated public transportation in Montgomery, Alabama.

But passive resistance only works if there is a baseline of humanity in the hearts of the oppressors. Mahatma Gandhi would have been strangled with piano wire if he had challenged Adolph Hitler. Rosa Parks would have disappeared into the Gulag if she had stood up to Stalin. Martin Luther King would have vanished into a concentration camp if he had opposed the Chinese Communist regime.

Martin Luther King and Rosa Parks displayed great courage--physical courage. The police departments of the South during the 1960s showed themselves to be ruthless, brutal, and lawless. But Southern racists finally bent to the national will for justice and racial equality, which the federal courts enforced.

Passive noncompliance with the New York City curfew is the perfect tactic for protesting the death of George Floyd. Why? Because the New York City Police Department, the courts, and the municipal government are basically liberal and humane institutions.

We should also remember that most people arrested for defying NYC's curfew will not spend much time in jail--if any. And this is a good thing. Locking up peaceful protesters in crowded detention centers cannot be justified given the risk that demonstrators could contract COVID-19 while incarcerated. I wouldn't do that, you wouldn't do that, and Major De Blasio won't do that either.

Violence and looting will dissipate in New York City in the coming days, but the nation's largest metropolis will pay the price for all these nights of civil unrest.  The coronavirus may return because thousands of people congregated on the streets with no thought to social distancing. Foreign tourists will decide to cancel their vacations in the Big Apple. A significant number of law-abiding New Yorkers will leave the city for warmer climes, lower taxes, and less social turmoil.

But for now, the spirit of Mahatma Gandi prevails in the City of New York, and the urban protesters who passively defy the city's curfew will win a victory over the police. As we pass through troubled times, let us remember to be thankful for the remarkable fact that Americans can engage in peaceful protest because America has a First Amendment that guarantees our right to free speech.

George Floyd gets 3 funerals: Who mourns the death of 2 black police officers?

Many years ago, I was driving on a lonely stretch of highway in northeast Louisiana when I was stopped for speeding by a Madison Parish deputy sheriff. The officer was polite and didn't threaten me in any way. Nevertheless, it was dark when I got pulled over, and I was a little frightened.

I suppose you could say it was an edifying experience because I never speeded through rural Louisiana again. In fact, I  gradually gave up speeding altogether because I didn't want to scare the hell out of myself by getting pulled over by a Southern cop.

Cops scare me, and I don't mess with them. I don't know anyone who does.

 I don't feel entitled to disobey a cop because I am a middle-class, white guy. Unlike a couple of attorneys in New York City, I don't feel privileged to throw a firebomb into a police cruiser simply because I have a law degree.

George Floyd's death is an outrage. The killing of any unarmed black man while in police custody is a tragedy. But I do not believe our nation's police departments are packed with racists. I agree with the Wall Street Journal editorial board, which said yesterday that "[a] solid body of evidence finds no structural bias in the criminal justice system with regard to arrests, prosecution or sentencing [of African Americans]."

Hysterical and baseless charges of endemic police racism have made cops vulnerable to violence.  David Dorn, a retired St. Louis police officer, was shot and killed by a looter while guarding a friend's pawn shot. A video shows him lying in his own blood on a sidewalk.  People were filming his mortal distress, but I didn't see anyone try to help him. Dorn was black.

Patrick Underwood, a federal security officer, was shot to death a few days ago while guarding a federal building in Oakland. Underwood was black.  

Mr. Floyd will have funerals in three states: Minnesota, North Carolina, and Texas. I'm sure Mr. Underwood and Mr. Dorn will have just one funeral.

Over the past week, more than a hundred law enforcement officers have been injured while they were trying to preserve public order and stop arson, looting, and vandalism.  Some of them are men. Some of them are women. Many of them are white, but some of them are black.

I don't know about you, but I'm in favor of "domestic tranquility"--the domestic tranquility that our Constitution promises to promote. And we won't have domestic tranquility if a significant portion of our population believes that attacking a police officer is justified as an act of civil disobedience.

David Dorn, retired police officer

Two lawyers are accused of throwing a Molotov cocktail into a police car: Let's give them at least two weeks of community service!

Law school graduates must take an oath to support the U.S. Constitution before they can practice law. In Texas, most beginning lawyers take the oath in a ceremony attended by all the justices of the state's supreme court. The swearing-in ceremony is a big deal.

I was in Alaska on my swearing-in day, and I took the oath in Anchorage. My pledge was notarized, and I pasted it on the back of my law license.  I have not practiced law in more than 30 years, but I am still bound by that oath.

Have times radically changed?

A couple of days ago, two New York lawyers were arrested and charged with throwing a Molotov cocktail into a police cruiser. Apparently, the attorneys were protesting the death of George Floyd. 

Urooj Rahman, a Fordham Law School graduate, is described as a human rights attorney. Colinford Mattis, a graduate of New York School of Law, is a furloughed lawyer with Pryor Cashman, an elite New York corporate law firm.

Of course, both attorneys are considered innocent until proven guilty; but the New York Post produced a photo that purports to show Rahman holding a Molotov cocktail.

What will happen to Rahman and Mattis if they are convicted of this crime? A few years ago, they would have been disbarred and sentenced to prison. But in these easy-going times, these two may escape that fate. Maybe a judge will assign them to a couple of weeks of community service like Jussie Smollett in Chicago. Perhaps they will sign lucrative book contracts and give speeches on college campuses. 

Maybe Rahman and Mattis will sue their law schools for negligently failing to teach them that throwing Molotov cocktails is a crime. If they play their cards right, they might wind up being law professors.

Don't you think it is time to face the truth about recent events in American cities?  Looting and vandalism in Minneapolis are not demonstrations as one news commentator stated; they are riots.  Nordstrom stores were not" impacted" by violent demonstrators, as Nordstrom's corporate message attested. They were looted.  Target stores were not shut down by a "demonstration," as Target's CEO described events in Minneapolis. They were vandalized.

Everyone of goodwill understands that Derek Chauvin, a Minneapolis police officer, committed a criminal act when he killed George Floyd. But that event, shocking as it is, does not justify two people, who are both sworn to uphold the U.S. Constitution, to commit a criminal act--as Rahman and Mattis are accused of doing.

As Americans, we have a constitutional right to our own views, which cross a broad spectrum from right to left. But surely we can agree that something has gone awry when two graduates of highly esteemed law schools get arrested for trying to set a police car on fire.

To hell with social distancing: Let's loot the liquor store!

Derek Chauvin killed George Floyd on Memoria Day. Riots began in Minneapolis on the following day and quickly spread across the country. Within a week of Floyd's death, more than half the states had called out their National Guard.

Dozens of police officers have been injured over a week of rioting. In New York City, almost four dozen police cars were damaged or destroyed. In Chicago, a policewoman was assaulted by rioters who tried to keep her from making an arrest.  In Minneapolis-St. Paul, more than 250 buildings were damaged or destroyed by rioters, including a police station and a post office. 

All this mayhem was triggered by the unjust killing of a black man, but I think there are other causes for all this violence. After all, there are 40 million Americans who are out of work.  Surely some protestors are on the streets simply because they are unemployed and bored.

For example, while watching the television coverage of the riots last week, I saw a slightly obese white guy in his fifties who was out on the streets of Minneapolis.  A television camera captured the man verbally abusing a police officer from a distance of about six inches from the officer's face. Does that guy have a job, I wondered? 

I don't wish to disparage the motives of the people who are demonstrating in our cities, but I think there would have been a lot less vandalism, arson, and looting if there were not so many jobless people.

A dude with a job would probably turn down an invitation to set fire to the post office. "It's a lovely invitation," he might say, "but unfortunately, I have to be at work tomorrow by 8 AM." 

He might also beg off from joining an expedition to loot the local liquor store. "I wish I could join you," he might explain," but I have to get the kids off to school tomorrow morning.

Requiring people to wear masks when they appear in public is also playing a role in all this chaos.  Many states passed anti-mask laws back in the 1920s to help bring down the Ku Klux Klan. But this past week, thousands of protesters were wearing masks that cloaked them in anonymity should they decide to throw a firebomb at a police cruiser.

George Floyd's death has fueled legitimate anger all over the United States. Everyone realizes that. But in my opinion, these riots will not be quelled so long as millions of Americans are jobless and required to wear masks when they are on the streets.

Burning police cars: requiring people to wear masks is part of the problem.

Second (and kinder) thoughts about distance learning at the universities during the coronavirus pandemic

Not long ago, I commented on the mass shift to distance learning at American universities, which were forced to close their campuses last March due to the coronavirus pandemic.

Disappointed students sued more than 50 colleges about the transition, arguing that the quality of their education had deteriorated when face-to-face instruction was suspended. I commented that the students were surely right and that distance learning is indeed inferior to traditional modes of teaching.

Since I wrote that commentary, however, I taught a course as an adjunct at my former university, and I was pleasantly surprised by the experience.  I delivered this course using two distance-learning tools: Moodle and Zoom.

With Moodle, I was able to post all my reading materials and communicate with my students about their assignments. Using Zoom, I met with a small group of students in "real-time," and we were able to discuss court cases very much as if we were all in the same room. 

This positive experience with distance learning caused me to revise my views. I now believe that most colleges can maintain the overall quality of their instruction, even if they are forced to rely heavily on distance learning in the upcoming fall semester. But I still believe something will be lost if universities rely too heavily on technology.

 Zoom, I learned, is an excellent way to meet with small groups of students who are in different places. I think seminars and small-class settings taught through Zoom or a similar product can continue with little loss in quality.

And it seems to me that large lecture classes will not be adversely affected if professors give their lectures by video.  After all, one of my first classes as an undergraduate more than 40 years ago had 700 students enrolled. I was given an assigned seat at the back of the auditorium and could hardly identify the gender of my professor.  Delivering video lectures may actually be an improvement over having instructors drone on to hundreds of students in a cavernous auditorium.

I am still skeptical of so-called asynchronous teaching, where the professor presents students with canned instructional units without ever having any personal interaction with them. In my view, this kind of education amounts to little more than a correspondence course.

I am also skeptical about distance-taught instruction that assesses student performance through pass-fail grading.  It has been my observation that all rigor goes out the window when a professor is grading students on a pass-fail basis. It is almost impossible to fail anyone when the assessment standards are so relaxed, and it is absolutely impossible to reward students who excel in their classes.

And I continue to be opposed to academic programs that are delivered entirely online. After all, who believes that an undergraduate degree, a master's degree. or a doctoral degree that is offered entirely online is in any way comparable to an academic degree taught traditionally on an actual college campus?

I wish all the colleges well as they adjust their academic programs in response to the COVID-19 pandemic.  I think most of them can deliver instruction this fall through various distance-learning formats without too much loss in quality.

Nevertheless, most students choose their colleges based on their perception of what their campus experience will be like. They don't just sit in classes, after all. They live in residence halls, interact with other students, and immerse themselves in all kinds of extracurricular activities. Some percentage of students will not go to college this fall if they can't have a traditional college experience.

Most commentators predict a significant enrollment decline if academic life doesn't get back to normal (or at least close to normal) by the fall semester. I think they are right. And the colleges that will suffer the most are the small liberal arts colleges and the regional public institutions.

This guy should be teaching online.

California ain't got the do re mi: Will Americans bail out the Golden State?

California is a garden of Eden, a paradise to live in or see;

But believe it or not, you won't find it so hot
If you ain't got the do re mi.

Woodie Guthrie

Just a few months ago, the California economy appeared to be in great shape. Governor Gavin Newsom predicted a $7 billion budget surplus for 2020, and the state had $16 billion in its rainy day fund.  

The governor was feeling so confident that he promised to distribute $75 million to the state's illegal residents.  Very thoughtful. But after all, what's $75 million to California, the world's fifth-largest economy?

But then COVID-19 came along like a drunken ex-spouse at your wedding reception, and the Golden State's economy began heading south.

Today, Governor Newsom projects a $54 billion budget deficit--more than three times the amount of the state's rainy day fund.  California has 4.2 million unemployed workers and huge healthcare expenses connected with the coronavirus. One in three Californians (13 million) are on Medicaid and can't pay their own medical bills.

And of course, California's financial problems are more severe than this year's budget deficit. According to the California Policy Center,California's state and local liabilities total $1.5 trillion.  

A lot of California's debt can be traced to high salaries paid to the state's civil servants and unfunded pension obligations to government workers.  California's public employees (professors, school administrators, hospital administrators, etc.) are paid well. In fact, about one-third of a million government employees draw salaries of $100,000 or more.  Over 1,400 of them are paid more than Governor Newsom.

California's state and local employees also enjoy great retirement plans. Some retired school administrators draw pensions of more than $300,000 a year.

California desperately needs a federal bailout to keep essential services going and to pay thousands of overpaid public workers. Indeed, Governor Newsom said he is optimistic about the state's economic future but, "My optimism is conditioned on this--more federal support." 

Hence, Nancy Pelosi's $3 trillion HEROES Act, which, if passed, will shower more than $1 trillion of federal money to distressed state and local governments.  If the Senate votes to approve Pelosi's bill, lots of federal money will arrive in California.

But there's just one problem with the HEROES Act. The national debt already tops $25 trillion. Pelosi's legislation will add another $3 trillion to that number.

So if the federal government bails out California, taxpayers in Kansas, Ohio, and Oklahoma will help pay the tab for those quarter-of-a-million dollar California pension benefits. The citizens of the Midwest will help fund the princely salaries of California's college professors and school superintendents.  

As Woodie Guthrie observed nearly 100 years ago, California is a garden of Eden and a beautiful place to call home. But the state's dwindling middle class is going to find that California is not so hot if you ain't got the do re mi to pay for a whole lot of high living by people who call themselves public servants.

But Governor Newsom, we ain't got the do re mi!

HEROES bill dishes out thin gruel for student-loan debtors: "Please, sir, I want some more."

In its original form, the HEROES bill was 1,800 pages long; and I am grateful to Steve Rhode of Get Out of Debt Guy for summarizing its essential elements.  The original legislation provided up to $10,000 in student-loan relief for borrowers holding federal or private loans.

By the time the House of Representatives approved the HEROES Act in mid-May, relief for student debtors was watered down considerably. As Mark Kantrowitz reported, the bill that was approved by the House limits relief to "economically distressed borrowers."

Who are the economically distressed borrowers? Mostly these benefits will go to people who are:

• in default on their loans or whose monthly payments are more than 90 days overdue,
• People with economic hardship deferments, cancer treatment deferments, or unemployment deferments,
• People whose loans are in forbearance and whose debt burden exceeds 20 percent of the borrower's income.

The HEROES Act was thin gruel when it was first introduced, but the gruel got even thinner by the time the House of Representatives passed it by a vote of 208 to 199.

Forty-five million Americans are burdened with federal student loans totaling $1.6 trillion, and private-loan borrowers owe about 125 billion. That's a lot of debt, and the HEROES Act offers only a few crumbs of relief.

Assuming the Senate approves the HEROES Act in its present form (which is not likely), most of this money will do nothing more than pay down the interest on borrowers' student-loan balances. People in income-driven repayment plans are seeing their debt grow larger with each passing month due to accruing interest. People whose student loans are in deferment or forbearance are not making their monthly loan payments, but interest is accruing on their loan balances as well.

In short, the HEROES Act is an insult to the millions of people who are being dragged down by unmanageable student loans. Like Oliver Twist, all 45 million student-loan borrowers should shout, "Please, sir, I want some more."

Please, sir, I want some more.

A JP Morgan economist says U.S. is heading toward a "Weimar Republic Inflation Setup": What in the hell does that mean?

Earlier this month, Zerohedge.com published an essay by an unnamed JP Morgan economist who predicted that the national economy is headed toward runaway inflation.

According to this anonymous commentator, money in circulation is multiplying through various types of government handouts while "asset prices . . . [are] being propped up by central banks."  Thus, he reasons, it is just a matter of time "until inflation goes from 'subdued' to 'out of hand.'" Indeed, the economist predicts, "If central banks have no or a soft-washed inflation mandate we are headed toward a Weimar Republic style inflation setup."

That prediction sounds scary, but what in the hell does it mean?

I had only a hazy notion of the Weimar Republic in the 1920s when inflation in Germany got crazy out of control. I recall seeing photographs of people carrying German currency around in wheelbarrows. But what does the Weimar experience have to do with our national economy? I was clueless.

So I read some books on the German economy in the 1920s. The Weimar Republic, I learned, was created in 1919 after Germany lost the First World War. The German monarchy collapsed in November 1918, Kaiser Wilhelm fled to Holland, and a constitution was drafted in the Germany city of Weimar.

When World War I began, the German mark was valued at around 4.2 marks to the dollar.  When the war ended, the allies (France, Great Britain, and the United States) imposed harsh reparations on Germany, and the mark's value dropped to 7.4 to the dollar.

From November 1918 until the mark was finally abandoned in 1923, Germany was caught in a vicious inflationary spiral until the mark ultimately fell to 4.2 trillion marks to the dollar. In other words, it was worthless.

How did that happen? A multitude of factors were at work, but it seems that Germany's inflation during the early 1920s was mostly a result of carelessness, government subsidies to industry and state-owned railroads, and the government's effort to keep German workers employed and support a half-million war widows and 1.5 million disabled former soldiers.

In the end, German printing presses were running around the clock in a vain effort to supply paper currency that was deflating in value almost by the hour. Salaried workers and people living on pensions were driven into poverty, and hunger became widespread.

All this suffering and despair fueled radical political parties--Bolshevik-style communism, right-wing paramilitaries, and ultimately--the Nazis.  Hitler himself pointed out that Germans with billions of marks were starving.

Is the United States headed in that direction, as the unnamed JP Morgan economist predicts? Maybe.

Our accumulated national debt is now $25 trillion, and dozens of states and cities are running deficit budgets. A bill is currently working its way through Congress that would spew out $3 trillion, with part of this money going to prop up state and local governments. At the rate we are moving, the U.S. will see its national debt grow to $30 trillion within the next couple of years.

The federal government is also propping up the higher-education industry with student-loan money that has enabled colleges and universities to increase their tuition at twice the annual rate of inflation.  More than 45 million Americans are burdened by student loans that total $1.6 trillion.

Our spendthrift economy has enabled the U.S. to drop its unemployment rate to a historic low--last year it was only about 3 percent. If our government restores some fiscal discipline, that rate will inevitably rise. In the summer of 1923, when inflation was utterly out of control, the German unemployment rate was only 3.5 percent. Two months later, after the Reich restored fiscal discipline, unemployment rose to 23.4 percent.

Germany's inflation during the Weimar years destroyed the nation's middle class. The American middle class has been shrinking for the last 20 years, and many middle-income workers are losing ground.

I do not believe the United States can continue propping up more than 4,0000 colleges, universities, and trade schools with federal student-aid money. When all this comes crashing down, thousands of people with good jobs in the groves of academe will be out of work.

Small, liberal arts colleges are already closing at an accelerating rate, and regional public colleges are laying off staff and faculty.

When inflation breaks out in the U.S. economy, the wealthy and the financial speculators will do just fine. It is the middle class that will suffer, including a lot of people working in colleges and universities who now think they have bullet-proof job security.

The Weimar years: When German money was worthless

References

Ferguson, Adam. When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. New York: Public Affairs Publishing (2010) (originally published in 1975).

Friedrich, Otto. Before the Deluge: A Portrait of Berlin in the 1920s. Harper Perennial (1995) (originally published in 1972).

Taylor, Frederick. The Downfall of Money: Germany's Hyperinflation and the Destruction of the Middle Class. New York: Bloomsbury Press (2013).

One-day bankruptcies for corporations and decade-long bankruptcy proceedings for student debtors: Is that fair?

Jonathan Henes, a corporate attorney, wrote an op-ed essay for the Wall Stree Journal a few days ago calling for Congress to codify one-day bankruptcies for financially troubled corporations. "The one-day bankruptcy would streamline the bankruptcy practice," Henes argued and would reduce business disruptions and legal expenses.

Henes's appeal in the Wall Stree Journal is not the only suggestion for streamlining the corporate bankruptcies that are sure to come due to the coronavirus pandemic.  A group of legal scholars wrote a joint letter recently asking Congress to appoint more bankruptcy judges to deal with corporate bankruptcies that are looming on the national horizon.

Henes's essay and the legal scholars' letter both make reasonable suggestions on behalf of America's big businesses. If corporate America backs these proposals, they have a good chance of being enacted into law.

But is anyone thinking about relief for America's distressed student-loan debtors? After all, according to the Department of Education's own report, 8.1 million college borrowers are in long-term repayment plans that are designed never to be paid off and which can last for as long as 25 years. How about some bankruptcy relief for these people?

It would be cruelly ironic if Congress codifies one-day bankruptcies for corporations while the Bankruptcy Code makes it nearly impossible for insolvent student-loan borrowers to discharge their college loans in bankruptcy.

And even student debtors who prevail in the bankruptcy courts often find themselves embroiled in appellate proceedings that can last for years.  Michael Hedlund, for example, filed for bankruptcy in 2003 and sought to discharge student loans he had taken out to go to Willamette Law School. 

Ultimately, a bankruptcy judge granted Hedlund a partial discharge, but the decision was reversed by a federal district court. Hedlund appealed to the Ninth Circuit Court of Appeals, which ultimately upheld his partial discharge. But the Ninth Circuit did not issue its opinion in Hedlund's case until 2013—ten years after he filed for bankruptcy!

One-day bankruptcies for big corporations and decade-long bankruptcy proceedings for beaten-down student debtors? That doesn't work for me.

References

Hedlund v.Educational Resources Institute, 718 F.3d 848 (9th Cir. 2013).

Henes, J. S. Congress Should Codify the One-Day Bankruptcy. Wall Street Journal, May11, 2020. 

Will Congress help corporations and ignore beaten-down student debtors?

Three out of four test-takers failed the California Bar Exam in February: Do you still want to be a lawyer?

This spring, pass rates for the California Bar Exam hit a historic low. Only 26.8 percent of the test-takers received a passing grade--about one out of four. The pass rate for retakers was even lower: a shocking 22 percent.

As one might expect, pass rates varied widely based on where the test-takers went to law school. People who studied at an ABA-accredited California law school had a pass rate of 42 percent, which is pretty poor odds.  But the poor blokes who got degrees from unaccredited distance-learning schools had a pass rate of only 16 percent.

No matter where students enroll, going to law school has gotten outrageously expensive. Most people who study law are forced to take out student loans.  According to one report, the average newly minted lawyer graduates with $145,550 in debt. How would you like to leave law school with $145,000 in college loans and then fail the bar exam? Or fail it twice?

People who graduate at the top of their class from elite schools (Harvard, Stanford, Michigan, etc.) generally find well-paying jobs with blue-chip law firms. But the leading U.S. law firms have been impacted by the coronavirus pandemic and are laying off lawyers and cutting salaries. Scroll down the list that Law360 compiled of the nation's most prestigious firms, and you will see that most of these big firms are hurting.

In other words, even law graduates with impeccable credentials are seeing their salaries cut due to COVID-19. People who graduate at the bottom of their class from second- and third-tier law schools will find it damned near impossible to pay off $150,000 in student loans because there are few decent-paying law jobs for these people.

So--if you are thinking about going to law school, do some research. Be sure to check out a couple of good web sites on the legal-education industry: Above the Law and Law School Transparency. Find out the bar pass rate and the average student-debt load for the law school where you intend to study. If you know some lawyers in the area where you hope to practice, ask them to share their thoughts about their local job market.

When I graduated from the University of Texas School of Law, the legal profession was a great way to make a living.  Tuition was very low, and I worked my way through school and graduated with no debt.  I did well in law school, graduating with honors, and I got several job offers.

In those days, even people who graduated with less than stellar grades could look forward to a stable job if they attended a well-respected law school. I had grown up in a small Oklahoma town, and law school opened up a bright, new world of seemingly limitless opportunities.

But those days are gone. Law school tuition is way too expensive. Today people who enroll at a mediocre law school are playing Russian roulette with their financial futures.

And law schools have lowered their admission standards to meet their enrollment goals, as evidenced by declining bar pass rates in states such as California.  This signals to me that the academic atmosphere of law school is not as stimulating now as when I was a law student.

So if you are dreaming about going to law school, think about it long and hard. Your world will definitely change if you get a J.D. degree, but it might not change for the better. Your dream of a better life could turn into a nightmare of bitterness, poverty, and regret.

Think hard about law school before you pull the trigger

Unnecessary roughness: Witholding transcripts, diplomas, and professional licences from students with unpaid bills

Last week, Louisiana legislators passed a bill out of the House Education Committee that would bar colleges from withholding diplomas, transcripts, and grades because of student debt. Representative Julie Emerson from the little town of Carencro sponsored the measure. 

Jim Henderson, President of the University of Louisiana System, praised the bill. "We have a number of more effective tools that we can utilize on student debt," President Henderson said at the legislative hearing on Emerson's bill. In fact, he said, denying grades and transcripts is akin to putting students in a "debtors prison."

Most of Louisiana's private colleges are in New Orleans, and Rep. Aimee Freeman, a New Orleans legislator, managed to exclude private schools from the bill, even though no one from a private college showed up to oppose the measure. "With [private college officials] not here," Freeman said defensively, "I am feeling that I have to offer the amendment."

The practice of withholding grades and diplomas from people who owe their colleges money is only one of many punitive measures against cash-strapped college students. The New York Times carried a story in 2017 about state laws that allow agencies to seize professional licenses from student-loan defaulters. According to Times reporters, 19 states have laws on the books that allow for the revocation or suspension of professional licenses, including the credentials of nurses, teachers, firefighters, attorneys, massage therapists, barbers, psychologists, and real estate brokers.

Senators Elizabeth Warren and Marco Rubio filed a bipartisan bill in 2018 that would prevent states from withholding driver's licenses and professional licenses over unpaid federal loans. The Times quoted Senator Rubio as saying, "It makes no sense to revoke a professional license from someone who is trying to pay their student loans." And Senator Warren called these policies "wrong and counterproductive."

I say Hurray to Representative Julie Emerson of Louisiana and Senators Rubio and Warren for trying to mitigate the harsh and iniquitous treatment of student-loan debtors.  And hurray to UL System President Jim Henderson, who articulated the voice of reason and compassion on behalf of Louisiana college students.

Representative Julie Emerson: Louisiana legislator

Income-Based Repayment Plans for Student Debtors: Flushing Money Down the Toilet

Congress has been dropping "helicopter money" into the national economy--adding significantly to the national debt, which now exceeds $25 trillion.

That's a lot of money for our grandchildren to pay back. My own grandkids are ambivalent about this situation. My four-year-old says he thinks he can do it if his dad will increase his allowance, but my six-year-old doesn't think it's fair for him to pay for his ancestors' wars in the Middle East.

Now let's look at another economic crisis our grandchildren will pay for--the federal student-loan program.

According to the U.S. Department of Education's own numbers, approximately 43 million Americans have student-loan debt totaling $1.5 trillion.  And, if DOE can read its own balance sheet, it will see that it has basically given up on collecting about a third of that debt.

As of the first quarter of this year, 8.1 million student borrowers are in income-driven repayment plans (IDRs). By the very terms of those plans, these borrowers make loan payments based on their income, not the amount they borrowed. Under most of these plans, borrowers at similar income levels make the same sized monthly loan payments regardless of whether they owe $20,000, $50,000, or $100,000.

Virtually everybody in an IDR is making payments so low that the underlying debt grows larger due to accrued interest--interest that is capitalized.  In other words, virtually no one in an IDR is going to pay off his or her student loans.

How much money are we talking about? DOE's recent report tells us that a half-trillion dollars ($507 billion) are owed by people in IDRs.  In fact, 400,000 people in IDRs owe $200,000 or more.  And--inexplicably--300,000 student debtors are in IDRs who owe less than $5,000.

As Education Secretary DeVos publicly acknowledged in late 2018, the federal government carries student-loan debt on its books as performing loans, which a commercial bank could not do. In fact, she made the astonishing admission that outstanding student loans make up 30 percent of all federal assets!

But in fact, at least 8.1 million student loans are not performing. On the contrary, the IDR programs were designed in such a way that borrowers never pay them back.  

Education Secretary Betsy DeVos announced last year that she was hiring McKinsey & Company, a private consulting firm, to determine just how big the student-debt debacle really is.  So far, she has released no report.

But we don't need a high-priced consulting firm to tell us what is going on. The student-loan program is bankrupt. And while Betsy DeVos sails along on her private yacht, DOE lawyers are hounding desperate student-loan borrowers through the bankruptcy courts, demanding that they be put into IDRs. Those IDR plans can last for as long as a quarter of a century, and virtually no one in such a plan will ever pay off their student-loan debt.

References

Ferguson, Adam. When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. New York: Public Affairs Publishing (2010) (originally published in 1975).