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

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

The Seventh Circuit applied the Brunner test too harshly.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

References

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

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

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

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

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

Gold will turn to gray and youth will fade away

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

Old and In the Way

Lyrics and music by David Grisman

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

But that stereotype could not be further from the truth.

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

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

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

And many student-loan defaulters are elderly.

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

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

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

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

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

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

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

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

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


References

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

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

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

U.S. General Accounting Office. Older Americans: Inability to Repay Student Loans May Affect Financial Security of a Small Percentage of Borrowers. GAO-14-866T. Washington, DC: General Accounting Office. http://www.gao.gov/products/GAO-14-866T

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

These few, these happy few, this band of brothers and sisters: Going into bankruptcy court without lawyers, a few intrepid souls obtained relief from oppressive student-loan debt

And Crispin Crispian shall ne’er go by,

From this day to the ending of the world,

But we in it shall be remembered-

We few, we happy few, we band of brothers . . .

Henry V

William Shakespeare

More than 20 million people have college loans they can't pay back. For most of them, their oppressive debt grows larger every day, as interest continues to accrue. It is now common for people to owe more than three times the amount of money they borrowed for postsecondary education due to interest, penalties and fees that were tacked on to their original loans.

Had these suffering souls borrowed money to purchase a pizza franchise or buy a house, they could discharge their debt in bankruptcy. Likewise, if they were financially crushed by catastrophic medical expenses or a divorce, they could wipe away their debt through the bankruptcy process.

But because they borrowed money to acquire an education, student-loan debtors cannot discharge their debt in bankruptcy unless they meet the "undue hardship" standard set forth in the Bankruptcy Code--a difficult standard to meet.

In fact, most people are so convinced that it is impossible to discharge student loans in bankruptcy that they don't even try.  Jason Iuliano, in a 2012 law review article, researched bankruptcy court records and found that almost a quarter of a million people with student-loan debt filed for bankruptcy in 2007, but less than 300 of them even attempted to discharge their student loans.

And indeed, discharging student loans in bankruptcy is daunting. Debtors are forced to file an adversary action--in essence, a law suit, against their student-loan creditors. 

Because people in bankruptcy generally have no money, they can't afford to hire an attorney to represent them in an adversary proceeding. In contrast. their debtors--the Department of Education, Sallie Mae, or debt collection agencies like Educational Credit Management Corporation--have lots of experienced lawyers to defend their interests.

Nevertheless, a few intrepid student-loan debtors have filed adversary actions in bankruptcy court and have been successful, and many of them proceeded without lawyers. 

Here are three examples:

Alexandra Acosta-Conniff, an Alabama school teacher and single mother of two, filed an adversary proceeding to discharge $112,000 in student-loan debt. On March 25, 2015, a bankruptcy court ruled in her favor, discharging all her student-loan obligations. Acosta-Conniff won her case without a lawyer.

George and Melanie Johnson, a married couple in their thirties with two school-age children, filed for bankruptcy in Kansas, seeking relief from $83,000 in student loans. In February 2015, a bankruptcy court ruled in their favor. Like Acosta-Conniff, the Johnsons won their case without a lawyer.

Educational Credit Management Corporation, perhaps the nation's most ruthless student-loan creditor, was a defendant in both  cases, and ECMC appealed both rulings. But the bankruptcy judges in both cases wrote persuasive and well-researched decisions,and Acosta-Conniff and the Johnsons have good prospects for prevailing on appeal.

Finally, we have Michael Abney, a single father of two, who borrowed $25,000 to pursue an undergraduate degree he never obtained, and was living on less than $1200 a month. He went to bankruptcy court without an attorney and defeated the Department of Education. Abney's case was decided in November of this year. 

These few, these happy few . . . Let us salute the courage of these brave individuals, who went to bankruptcy court without lawyers and were victorious. And let us salute the bankruptcy judges who rose to their duty to give honest but unfortunate debtors a fresh start--which is the very purpose of the American bankruptcy courts. 

References

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

Acosta-Conniff v. Educational Credit Management Corporation, No. 12-31-448-WRS, 2015 Bankr. LEXIS 937 (Bankr. M.D. Ala. March 25, 2015).

Johnson v. Sallie Mae & Educational Credit Management Corporation, Case No. 11-23108, Adv. No. 11-6250, 2015 Bankr. LEXIS 525 (Bankr. D. Kan. Feb. 19, 2015).

The Department of Education's Lynn Mahaffie wrote a disingenuous letter outlining when the Department of Education will not oppose bankruptcy discharge for student-loan debtors under the Undue Hardship rule

The Department of Education's Lynn Mahaffie issued a letter last July outlining when DOE and its debt collectors will not oppose bankruptcy discharge for student-loan debtors.  In fact, Mahaffie's letter is disingenuous.

Reading Mahaffie's letter, you might think DOE and its debt-collecting lackeys would not oppose a bankruptcy discharge for student-loan debtors who are in truly distressing circumstances or when it would be pointless to try to collect the debt. But you would be wrong.

In fact, DOE and its debt collectors oppose bankruptcy discharge for nearly everyone.

Here are some examples:

In Myhre v. Department of Education, DOE opposed bankruptcy discharge for a quadriplegic student-loan debtor who was working almost full time but could not make enough money to pay his living expenses, including the cost of a full-time caregiver.

In Roth v. Educational Credit Management Corporation, ECMC, perhaps DOE's most ruthless debt collector, opposed a bankruptcy discharge for a 68-year-old woman with chronic health issues who was living on a Social Security check of less than $800 a month.

In Abney v. U.S. Department of Education, decided after Mahaffie's letter was issued, DOE opposed a bankruptcy discharge for a man living on less than $1200 a month and who rode a bicycle to work because he couldn't afford a car.  This poor guy was making child-support payments that almost equaled his take-home pay and had lost his home to foreclosure. In fact, this man's situation was so desperate that he lived for a time in the cab of one of his employer's trucks. And DOE demanded that he be put in a 25-year repayment plan!

Mahaffie's letter listed several factors for determining when to oppose a student-loan debtor's bankruptcy discharge, including the debtor's age and health status. But DOE is garnishing the Social Security checks of 150,000 elderly people and fighting bankruptcy relief without regard to a student-loan debtor's health status. Hey, if DOE fights bankruptcy discharge for a quadriplegic, it fights it for everyone.

And Mayaffie also indicated that DOE and student-loan creditors wouldn't fight bankruptcy discharge if litigation costs outweighed the likely benefits. But in Kelly v. Educational Credit Management Corporation, ECMC chased a student-loan debtor through the federal courts for seven years!

Frankly, Mahaffie's letter is insincere. Contrary to the representations in her letter, the Department of Education and Educational Credit Management Corporation fight nearly every student-loan bankruptcy with almost desperate ferocity.  It knows that millions of people are entitled to bankruptcy relief from their student-loan debt under standards being laid down by compassionate bankruptcy courts. And it knows if student-loan debtors start getting the relief to which they are entitled under basic principles of fairness and justice, the student loan program will collapse.

Lynn Mahaffie, J.D.
DOE's Deputy Assistant Secretary wrote a disingenous letter

References

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

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

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP 2013).

Harvard Economist N. Gregory Mankiw Provides a Lazy and Self-Serving Answer to Why College Costs So Much

Harvard Professor N. Gregory Mankiw wrote a lazy and self-serving op ed essay in the New York Times today, in which he purported to explain why college costs so much.

Like most of higher education's shills (Sandy Baum, Susan Dynarski, Catharine Hill, etc.), Professor Mankiw began his pitch by assuring us that college is still a good investment. The median wage for a college graduate, Mankiw reminds his readers, is about twice as much as the median wage for a worker with only a high school education.

Of course it is true that college graduates generally make more money than people with only a high school education, but that fact doesn't justify skyrocketing costs across almost all sectors of higher education. Nor does it justify the ever-increasing amount of money people are borrowing in order to attend college.

Mankiw then goes on to give three explanations for why college costs are going up--all bogus:

First, Professor Mankiw instructs us, we have "Baumol's cost disease."  According to Mankiw, Baumol recognized that as wages rise across all sectors of society, salaries rise even for services that have seen no increase in productivity.

Of course everyone knows that. It costs more for a haircut today than it did a generation ago, even though barbers haven't grown more efficient. Likewise, the cost of higher education has gone up. We used to call that phenomenon inflation, but Professor Mankiw prefers to call it Baumol's cost disease.

But of course this blather does not explain why the cost of higher education has gone up three times the rate of inflation over the past 30 years.

Second, Mankiw argues, higher education seems more expensive due to rising inequalities in society as a whole.  Here I'll let Mankiw explain this argument in his own words:

Educational institutions hire a lot of skilled workers: It takes educated people to produce the next generation of educated people. Thus, rising inequality has increased not only the benefit of education but also the cost of it.

OK, Professor Mankiw, what you say may be true. But again, how does that argument explain why college costs have risen much faster than inflation?

Finally, Mankiw explains, college costs haven't gone up as much as the public thinks because most students aren't paying the sticker price.  Colleges engage in "price discrimination," with only the suckers paying full price. And of course this is true. On average, private liberal art colleges are only collecting about 60 percent of the sticker price because they give discounts in the forms of grants and scholarships to preferred students.

In other words, Professor Mankiw is trying to assure Mr. and Mrs. America that when their children go to college, they'll probably get some sort of brother-in-law deal and won't be paying full price.

All this is pure horse manure. At bottom, Professor Mankiw is merely defending the status quo in higher education, just as Vassar's Catharine Hill did a couple of weeks ago in the Times when she argued against free college education. In fact, when you read Professor Mankiw's essay closely, which he hopes you won't do, he really isn't saying anything at all.

The reality is this: the cost of higher education has gone up for a variety of reasons, and many of those reasons are tied to greed and laziness.  At the elite universities, tenured professors are teaching fewer classes--ostensibly to have more time to do more important things.  College costs could go down if every professor taught the typical teaching load of 30 years ago.  I would be surprised, for example, if Professor Mankiw teaches more than three courses a year.

Moreover, the cost of attending for-profit colleges is especially high, much higher than a comparable educational experience at a community college or public university.  Students who attend these rapacious institutions borrow more money than students who go to public schools. and their student-loan default rates are shocking. According to the Brookings Institution, the five-year loan default rate in the for-profit sector is nearly 50 percent.  But of course, Professor Mankiw didn't even mention the for-profit colleges.

College costs have also gone up because the number of ancillary employees has increased. For example, Harvard was recently ridiculed for printing special placemats that contained instructions to students about how to answer their parents' embarrassing questions when they went home for the holidays.  As if Harvard students are too stupid to know how to talk to their parents or to have their own opinions.

How much, do you suppose, Harvard is paying the person who dreamed up and printed those embarrassing placemats? Well--whatever it is, that amount adds to the cost of Harvard's tuition.

In truth, the cost of postsecondary education is out of control for multiple reasons, and the problem varies in its seriousness across higher education's many sectors. For-profit colleges charge too much; almost all objective commentators agree. Professional education is far too expensive. In particular, the law schools have jacked up tuition prices and are producing about twice as many lawyers as the nation needs. Administrators' salaries have gone up faster than professors' salaries, and numerous frills--fitness centers, luxury student housing, recreational facilities like LSU's "Lazy River"--all this has contributed to the spiraling cost of higher education.

About all these issues, Professor Mankiw had nothing to say.

Personally, I found Professor Mankiw's essay offensive. Millions of people can't pay back their student loans, and most can't discharge those loans in bankruptcy.  Meanwhile, the Department of Education and the policy wonks are urging the expansion of long-term repayment plans that will force Americans to pay on their student loans for 20 or 25 years. In short, the student loan program is a mess, and Professor Mankiw prattles on about Baumol's cost disease!

Professor Mankiw's op essay in the Times was nothing  more than a lazy and self-serving defense of the status quo--a status quo than benefits people like Professor Mankiw.

Professor N. Gregory Mankiw: He likes the status quo.

Deeper into the abyss: Obama introduces REPAYE, yet another income-based student-loan repayment plan designed to turn students into sharecroppers

This week, the Obama administration introduced REPAYE, a new student-loan repayment plan.  Like PAYE ("Pay As You Earn"), REPAYE allows borrowers to pay back their student loans over a 20 year period and to make monthly payments no larger than 10 percent of their discretionary income.  REPAY, however, is available to borrowers who were not eligible for PAYE.

What is the significance of this new development?

It's complicated.  First of all, REPAYE is the federal government's fourth income-based repayment plan. We now have:

• ICR Plan (Income-Contingent Repayment Plan)
• IBR Plan (Income-Based Repayment Plan
• PAYE (Pay  As You Earn Repayment Plan
• REPAYE (Revised Pay As You Earn Repayment Plan)

Not all borrowers are eligible for all plans, and some plans are more favorable to debtors than others. DOE issued a 26-page set of guidelines called "Income-Driven Repayment Plans: Questions and Answers," but the guidelines are complicated.

Here is a sample passage:

The REPAYE, PAYE, and IBR plans offer an interest benefit if your monthly payment doesn't cover the full amount of interest that accrues on your loans each month. Under the three plans, the government will pay the difference between your monthly payment amount and the remaining interest that accrues on your subsidized loans for up to three consecutive years from the date you begin repaying the loans under the plan. Under the REPAYE Plan, the government will pay half the difference on your subsidized loans after this three-year period, and will pay half the difference on your unsubsidized loans during all periods.

Millions of people are already confused by their student loans. Some don't know if they have private loans or federal loans, some don't know how many loans they have, some don't know how much they borrowed or what they now owe, and some people don't even know that they took out a student loan.

For the 20 million people who aren't able to make loan payments under a standard 10-year repayment plan, REPAYE is not going to offer much relief.  It's just another level of bureaucracy and administrative regulations.

REPAYE is a new sign of desperation. Second, REPAYE is just another sign of the federal government's desperation about the federal student loan program. As the New York Times noted a few weeks ago, 10 million people have either defaulted on their student loans or are delinquent in their payments.  About 4 million are making payments under the government's first three income-based repayment plans; and most are not making payments large enough to cover accruing interest.  And a bunch more have gotten some kind of deferment from making loan payments based on economic hardship.

The government's response to all this chaos and misery is to roll out ever more generous long-term repayment plans.  But this strategy hides the fact that millions of people on these plans will never pay back the principle on their loans and for all practical purposes are in default.

REPAYE is really just a program for turning college students into sharecroppers for the federal government.  But the real problem with REPAYE, with PAYE and with IBR and ICR are that these plans force millions of people to make payments to the federal government for a majority of their working lives in return for the privilege of attending college.  In effect, the government is turning our nation's young people into a generation of sharecroppers.

And remember, for most people, these 20- and 25-year repayment plans don't begin when students graduate from college. Often former students struggle for five years or more with their student loans before they finally sign up for a long-term repayment plan.  And that's when the long-term repayment plan starts.  Thus a person who graduated in 2010 and joins an income-based repayment plan this year, will not be free of student loan debt until 25 or 30 years after first enrolling in college.

President Obama, Arne Duncan, the Brookings Institution, and higher education leaders like Vassar's Catharine Hill hail long-term repayment plans as a solution to the growing student-loan crisis. But of course, these plans are not a solution at all. They're a strategy for turning Americans into indentured servants.

Go to college and become a sharcropper!

Vassar's Catharine Hill: What the kiddies need is a nice long-term repayment plan!

Interest, fees and penalties are burying millions of student-loan debtors--not the amount these poor people borrowed to go to college

Sometimes, huge problems can be analyzed best by simply boiling down the complexity of a situation into a simple phrase.  For example, "It's the economy, stupid," crafted by Democratic political strategist James Carville, summarized a central theme of Bill Clinton's 1992 presidential campaign.

Likewise, we can summarize at least one huge element of the student-loan crisis by focusing on one core fact: accrued interest, penalties and fees are burying millions of student-loan debtors, not the amount of money these poor people borrowed to attend college.

For example, I have a friend on the East Coast who borrowed a total of about $55,000 to obtain a bachelor's degree and a graduate degree; and he paid nearly $14,000 on those loans.  Unfortunately, my friend suffered a series of unfortunate life events--health issues, divorce, and job loss.  Now at age 67, he is living entirely on Social Security and a small pension. The Department of Education is garnishing his meager retirement income, and he is living on only $1200 a month.

A few weeks ago, my friend filed an adversary complaint in bankruptcy court, seeking to discharge his student-loan debt based on the Bankruptcy Code's "undue hardship" provision. Guess how much the government says he owes? $120,000--including accrued interest and $23,000 in collection costs. That's more than twice the amount my friend borrowed.

And this case is not atypical. In Halverson v. U.S. Department of Education, Stephen Halverson borrowed about $132,000 to obtain two master's degrees. Just as with my East Coast friend, life happened for Mr. Halverson: a job loss, serious health issues, a divorce, medical expenses for a child, and expenses incurred to care for an aging parent.

At times, Mr. Halverson was unable to make payments on his student loans, but he obtained a series of economic hardship deferment, and he was never in default.  Nevertheless, when Halverson was in his 60s, it was clear he could never pay back his student loan debt. By the time he filed for bankruptcy, his total deb had ballooned to almost $300,000--more than twice the amount he had borrowed. And Mr. Halverson's job at that time only paid $13.50 an hour.

Various public-policy analysts have argued that there is no student-loan crisis because most people borrow relatively modest amounts of money--typically about the amount of a car loan. But these analysts ignore two key facts:

1) Even a small student loan is a huge burden for someone who doesn't have a job or who has a low-income job.

2) People who are unable to make their monthly loan payments must obtain an economic hardship deferments or enter a long-term repayment plan in order to avoid default. And both options mean that the debtor's loan balance goes up due to accruing interest.

Thus we see people like Liz Kelly, featured in a recent New York Times article, who owes $410,000 on her student loans, far more than she borrowed to attend college and graduate school. Today, at age 48, the annual interest cost on her indebtedness is more than the entire amount she borrowed to obtain her bachelor's degree!

And I know a man in California who borrowed around $70,000 to finance his education, and paid back about $40,000. Now the Department of Education claims he owes more than $300,000, including a one-time penalty assessed in the amount of $59,000! That one penalty is more than 80 percent of the entire amount he borrowed!

Surely it should be apparent to everyone--even Secretary of Education Arne Duncan, President Obama and Congress--that adding interest, fees and penalties to people's student-loan debt only increases the likelihood of default.

The higher education industry and the Department of Education have embraced economic-hardship deferments and long-term repayment plans because both programs hide the fact that millions of people can't pay off their student loans.

Does anyone think, for example, that Liz Kelly, who was unable to pay back the $25,000 she borrowed to get an undergraduate degree, will ever pay back the $410,000 she currently owes.? Does anyone think my East Coast friend, who is living on about $1,200 a month, will ever pay back $120,000?

Like a seething volcano about to erupt, pressure is building on the federal student loan program. Currently, about 41 million Americans owe a total of $1.3 trillion in outstanding student loans. Let's face it: at least half that amount will never be paid back.

References

Kevin Carey. (2015, November 29). Lend With a Smile, Collect With a Fist. New York Times, Sunday Business Section, 1. Accessible at: http://www.nytimes.com/2015/11/29/upshot/student-debt-in-america-lend-with-a-smile-collect-with-a-fist.html?_r=0


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