The White House wants to kill the Public Service Loan Forgiveness Program: But who can stop a tidal wave?

President Trump's White House proposes to eliminate the Public Service Loan Forgiveness Program (PSLF), which has triggered howls of protest. Jordan Weissmann, writing for Slate, described the proposal as a "sick joke" perpetuated by an out-of-touch President and an out-of-touch Secretary of Education:

A billionaire president and billionaire education secretary, neither of whom spent a single day of their lives in public service before stumbling their way into positions of immense power, are targeting a program that's basically meant to make life in underpaid government work a little more tenable. 

The Public Service Loan Forgiveness Program: A Very Generous Student Loan Program 

But in fact the issue of whether the PSLF program should be eliminated is a little more complicated than Weissmann described.  To get a clear understanding of what is at stake, people should read Jason Delisle's brief report on PSLF (only 5 pages of text) prepared for the Brookings Institution.

As Delisle explains,Congress initiated the PSLF program in 2007 along with the Income-Based Repayment Plan. (IBR). Student-loan borrowers who take public-service jobs are eligible to have their student loans forgiven after 10 years of loan payments. Furthermore, under IBR, student-loan borrowers' monthly payments were initially set at 15 percent of their gross adjusted income.

The PSLF program defines eligible public service broadly to include employment with a nonprofit agency or any federal, state, or local government. In fact, as Delisle points out, 25 percent of the American workforce qualify for PSLF under this definition of public service (p. 3).

As generous as the PSLF program was in 2007, the program became significantly more generous when the Obama administration introduced PAYE and REPAYE--two repayment plans that required borrowers to  make monthly loan payments totally only 10 percent of their adjusted gross income rather than 15 percent. As Delisle explains, "Had the [Obama] administration left the original IBR program in place, borrowers would have paid 50 percent more before having their remaining debt forgiven under PSLF" (p. 3).

PSLF: Distorted Incentives to Borrow Heavily for Graduate School

Significantly, the PSLF program set no cap on the amount students can borrow for their studies. Apparently, Congress did not anticipate that a high percentage of PSLF participants would be graduate students who would rack up six-figure student-loan debt to enroll in expensive graduate programs: law school, MBA programs, etc.

As Delisle explains, policy makers "who thought PSLF would be a small-scale program likely did not foresee that borrowers enrolled in PSLF would have some of the highest loan balances in the federal student loan program. In fact,  "[t]he median debt load of those enrolled in PSLF exceeds $60,000, and nearly 30 percent of PSLF enrollees borrowed over $100,000."

In essence, the PSLF program and the IBR program (including PAYE and REPAYE) act together to create a perverse incentive for graduate students to borrow excessive amounts of money because their monthly payments will not be affected. As Delisle explained:

Thanks to PSLF, [an already indebted graduate] student . . . who is faced with the choice of borrowing $10,000 to live frugally while enrolled in graduate school or $20,000 to support a more comfortable lifestyle is probably more inclined to choose the latter. (p. 6)

In short, as Delisle accurately summarizes, "[t]he high loan balances among enrollees helps to expose that PSLF is really a de facto loan forgiveness program for graduate students, who can borrow without limit" (p. 4, emphasis and italics supplied).

The Obama Administration Recognized that the PSLF Program Needed to Be Revised

To its credit, the Obama administration recognized that the PSLF program would soon be hemorrhaging money and needed to be revised to reduce the program's enormous costs. The administration proposed a cap of $57,000 on the amount that can be forgiven under PSLF and removing the cap on the amount of monthly payments. The Congressional Budge Office originally estimated these reforms would save the government about $400 million and then revised that estimate to $12 billion.

But the Obama reforms were never implemented, and the Trump administration inherited a program that is basically  providing free graduation education to most PSLF participants.

What will PSLF cost American taxpayers? No one knows

 How much will PSLF cost American taxpayers? No one knows. Approximately 432,000 people were officially certified to participate in PSLF according to government data Delisle reviewed in his 2016 paper. An article in the New York Times, published less than two months ago, reported a figure of 550,000 certified PSLF participants--25 percent higher than the number Delisle's paper reported.

But the number of PSLF participants could be considerably higher than any number reported so far because, as Delisle pointed out, people are not required to be get pre-certified as a condition of participating in the program. That's right, borrowers can apply to the PSLF program retroactively.

Conclusion: A Tidal Wave of  Forgiven Student Loan Debt is Bearing Down on the Trump Administration

The PSLF program is now ten years old, and the first group of PSLF borrowers will be eligible to have their loans forgiven by the end of this year. As Delisle explained so cogently in his Brookings essay, PSLF has turned out to be a bonanza for people to borrow unlimited amounts of money to go to graduate school. Because participants are only required to make token payments equal to 10 percent of their adjusted gross income for ten years, most PSLF participants are making payments so low that their payments are less than accruing interest.

Basically, the PSLF program is a tidal wave bearing down on the Trump administration.The White House has responded by defunding the program in its proposed budget, but shutting down PSLF may be politically impossible.  After all, as Weissmann pointed out, a lot of people went to graduate school based on the reasonable assumption that they were entitled to enroll in PSLF. It would be unfair to shut down the PSLF program precipitously, leaving thousands of student borrowers in the lurch.

In any event, who can stop a tidal wave?

The brutal reality is this: No matter what this presidential administration does about the PSLF program, it is going to cost taxpayers tens of billions of dollars.

References

Stacy Cowley. Student Loan Forgiveness Program Approval Letters May Be Invalid. New York Times, March 30, 2017. 

 Jason Delisle. The coming Public Service Loan Forgiveness bonanza. Brookings Institution Report, Vol 2(2), September 22, 2016.

Jordan Weissmann. Betsy DeVos Wants to Kill a Major Student Loan Forgiveness Program, Slate, May 17, 2017.

Manhattan Institute Report: State Pensions Costs Threaten Higher Education. Dancing on the Titanic

Earlier this month, Daniel DiSalvo and Jeffrey Kucik of the Manhattan Institute published a brief report (only 10 pages of text) that should scare the hell out of American higher education. In essence, the report made three main points:

• States are cutting contributions to higher education, something we already knew.

• Tuition costs are rising to deal with the shortfall, and tuition increases are not being matched by a rise in median family income. We already knew that as as well.

• State pension costs are out of control and will absorb a larger and larger share of most states' budgets.

This last point--the catastrophic rise in pension obligations--is also something we already knew, but DiSalvo and Kucik's report drives this point home with brutal clarity. 

As the authors explain in their introduction, the stock market crash of 2008 led to a sharp devaluation of pension fund assets--about a $1 trillion loss. In addition, persistent underfunding of pension funds "has led to a net deficit across all states of about $4 trillion, or one-third of total U.S. GDP." (p. 5, emphasis supplied).

All states have reformed their pension programs in some way to respond to the shortfall, but these reforms are not enough to bring pension fund liabilities in line with pension fund assets.

Meanwhile, the average number of pension beneficiaries per state has tripled from 500,000 to 1.5 million, while the number of active public employees paying into pension funds has stayed roughly constant. (p. 7). Clearly, state pension funds are rapidly moving toward collapse

Let's look at the numbers for a few states.

California's pension liabilities have increased by 41 percent over just seven years to $890 billion in 2015. That was two years ago. By now California's pension liabilities must be nearly $1 trillion.  

New York's pension liabilities were nearly half a trillion dollars in 2015, a 30 percent increase over 2008. And Governor Andrew Cuomo is offering free college tuition to New Yorkers!

Texas, where my pension fund is located, had about a quarter of a trillion dollars in pension obligations in 2015--a 42 percent increase from 2008.

How is higher education impacted by this looming train wreck? States have no other choice but to reduce expenditures for higher education even further if they have any hope of meeting their pension obligations. 

Thus, it is clear, students will be forced to borrow more and more money in coming years in order to pursue postsecondary education.

Is anyone in higher education worried about this? No, college leaders are absorbed with more pressing matters--trigger words, safe spaces, and controversial commencement speakers.

In short, everyone in higher education--students, professors, and administrators--are behaving very much like the romantic couple in the movie Titanic--dancing in steerage while their ship steams closer and closer to a lethal iceberg.

Dancing on the Titanic

References

Daniel DiSalvo and Jeffrey Kucik. On the Chopping Block: Rising State Pension Costs Lead to Cuts in Higher Education. Manhattan Institute Report, May 2017.

Will the Student Loan Crisis Bring Down the Economy? My Pessimistic View

Mike Krieger recently posted a blog on Liberty Blitzkrieg in which he argued that two issues will dominate American politics in the coming years: health care and student loans.

"Going forward," Krieger wrote,  "I believe two issues will define the future of American politics: student loans and healthcare. Both these things . . .  have crushed the youth and are prevent[ing] a generation from buying homes and starting families. The youth will eventually revolt, and student loans and healthcare will have to be dealt with in a very major way, not with tinkering around the edges."

Krieger concluded his essay with this pessimistic observation:

Student loans and healthcare are both ticking time bombs and I see no real effort underway to tackle them at the macro level where they need to be addressed. Watch these two issues closely going forward, as I think fury at both will be the main driver behind the next populist wave.

Krieger's dismal projection regarding student loans is supported by recent reports from the Federal Reserve Bank of New York.  The Fed reported that more than 44 million people are now burdened by student loans. About 4.7 million borrowers are in default and another 2.4 million are delinquent.

Moreover, a lot of this debt is carried by older Americans. According to Fed data, $216 billion is owed by people who are 50 years old or older. And we know from other sources that student loan debt is following people into their retirement years. In fact, about 170,000 people are having their Social Security checks garnished due to student loans that are in default.

Borrowers carry debt levels of varying amounts, but the Fed reported that 2 million people owe $100,000 or more on student loans. Interestingly, people with small levels of debt are more likely to default than people who have high levels of indebtedness. In the 2009 cohort, 34 percent of people who owed $5,000 or less had defaulted within five years. Among people owing $100,000 or more, only 18 percent defaulted during this same period.

And of course default rates don't tell the full story. Almost 6 million people have signed up for income-driven repayment plans, and most are making payments so low they will never pay off their loans. Millions more have loans in deferment or forbearance; and these people aren't even making token loan payments. Meanwhile, interest is accruing on their loans, making it more difficult for borrowers to pay them off once they resume making payments.

Surely, this rising level of student-loan indebtedness has an impact on the American economy. According to the New York Times, student loans now constitutes 11 percent of total household indebtedness--up from just 5 percent in 2008.  Obviously, Americans with burdensome levels of student-loan debt are finding it more difficult to buy homes, start families, save for retirement or even purchase basic consumer items.  No wonder sales at brick-and-mortar retail stores are down and the casual dining industry is on the skids.

So far, as Krieger pointed out, our government is tinkering around the edges of the student loan crisis, making ineffective efforts to rein in the for-profit college industry and urging students to sign up for long-term income-driven repayment plans.

But this strategy is not working. According to the General Accounting Office, about half the people who sign up for income-driven repayment plans are kicked out for noncompliance with the plans' terms. The for-profit colleges, beaten back a bit by reform efforts during President Obama's administration, have come roaring back, advertising their overpriced programs on television.

All this will end badly, but our government is doing everything it can to forestall the day of judgment. In Price v. U.S. Department of Education, a case I wrote about earlier this week, the Department of Education took six years to make the erroneous decision that a University of Phoenix graduate was not entitled to have her loans forgiven. DOE's ruling clearly violated federal law, and the Phoenix grad finally won relief in federal court.

But DOE isn't concerned about following the law. It just wants to stall for time--knowing that a student-loan apocalypse is not too far away.

The Student Loan Apocalypse

References

Michael Corkery and Stacy Cowley. Household Debt Makes a Comeback in the U.S. New York Times, May 17, 2017.

Mike Krieger. Student Loans and Healthcare--Two Issues that Will Define American Politics Going Forward. Liberty Blitzkrieg, May 4, 2017.

Meta Brown, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw. Looking at Student Loan Defaults through a Larger Window. Liberty Street Economics (Federal Reserve Bank of New York. February 19, 2015.

Private liberal arts colleges are discounting tuition by an average of 44 percent--undercutting the credibility of their sticker prices

Rouses Supermarkets, a Louisiana food chain, advertised a wine and spirits sale a few days ago. Three Olives root beer vodka--normally priced at $20 a bottle, was on sale--4 bottles for ten bucks!

Did I rush to my nearest Rouses grocery store to stock up on root beer vodka? No, I did not. Instead I formed a negative opinion of the stuff. I concluded that any vodka that can be purchased on sale for two dollars and fifty cents a bottle is probably not worth $20 a bottle.

Private liberal art colleges are risking their long term viability by slashing their posted tuition prices drastically. Last year, the colleges discounted freshman tuition by an average of 49 percent; and tuition for students as a whole were slashed by an average of 44 percent.

In an informative article for Inside Higher Ed, Rick Seltzer identified  two trends that are driving colleges to heavily discount their tuition prices.  First, students' families need increased levels of financial aid in the wake of the 2008 recession. Second, colleges are heavily competing for students due to a downward demographic trend of fewer college-age students in the population. Ken Redd, research director for the National Association of College and University Business Officers (NACUBO) was quoted as saying he saw nothing on the horizon that would dissipate those trends.

Not surprisingly, small colleges are discounting tuition more heavily than large comprehensive universities.  At the small schools, freshman tuition is being discounted by more than 50 percent.

According to NACUBO's report, tuition discounting is happening even as colleges raise their sticker prices. Unfortunately, for many colleges, this tactic has not increased net revenue. “If you adjust for inflation, many schools are actually seeing real decreases in net tuition revenue,” Mr. Redd said.

Increased tuition discounts is just another sign that private liberal arts colleges are under an existential threat. Several have closed already, and others are taking drastic action to cut their costs.

Holy Cross College in Indiana sold 75 acres of real estate to Notre Dame to bolster its financial picture even as it struggled to quell rumors that it will soon be closing. Wheeling Jesuit University is encouraging faculty members to retire early.  Mills College, a small women's college in California, is laying of faculty members. Mills is running a $9 million deficit on a $57 million operating budget--clearly not sustainable.

At some colleges, administrators are finding that a smaller and smaller percentage of applicants who are admitted actually show up as students.  Mills for example, admitted 1,242 applicants in 2013-2014; and only 217 applicants actually enrolled. In 2015, the enrollment picture was even bleaker: 639 applicants were admitted and only 139 students actually enrolled.

Some small private colleges will survive in spite of the bleak financial picture. Those that have real estate to sell, like Holy Cross, can keep the wolf from the door for a few more years. Colleges that have large endowments can draw down those funds to meet their budgets.

But ultimately, a lot of small liberal arts colleges are going to close. Their target customers won't be hurt by this trend; they will simply enroll at public institutions. But faculty and staff  from closed colleges are going to find it very difficult to find new jobs.

References

Scott Jaschik. 'Financial Emergency' at Mills. Inside Higher Ed, May 17, 2017.

Rick Seltzer. Discounting Keeps Climbing. Inside Higher Ed, May 15, 2017.

Rick Seltzer. Holy Cross College to Sell Land to Notre Dame. Inside Higher Ed, May 15, 2017.

Rick Seltzer. Early Retirements at Wheeling Jesuit. Inside Higher Ed, May 10, 2017.

University of Phoenix graduate got her student loans discharged on the grounds that Phoenix falsely certified she was eligible to receive the loans

 As the Department of Education attests on its own web site, DOE will forgive or cancel student loans under certain circumstances. For example, students are entitled to have their loans forgiven if the school they were attending closes while they were enrolled or shortly after that.   Students can also obtain a discharge if they can show they were induced to take out student loans through fraud. And students are also entitled to have their student loans discharged if the school they attended falsely certified that they were eligible to receive a federal student loan.

Unfortunately, the administrative process for obtaining a loan discharge is not easy to navigate. In fact, one might conclude that DOE sets up roadblocks to prevent student borrowers from getting the releases to which they are legally entitled. Price v. U.S. Department of Education, decided last year, illustrates just how difficult it can be to obtain a loan discharge even when a student is clearly qualified for relief.

Price v. U.S. Department of Education: The facts

Phyllis Price graduated with a degree from the University of Phoenix in 2005. She paid for her studies by taking out student loans, which she consolidated into a single loan for $36,868 bearing interest at 5.3 percent.

Price was 52 years old when she began her studies at the University of Phoenix and had not graduated from high school. A university counselor "instructed her to state on the [admission] application that she had actually finished school and to fill in the year she 'should have graduated.'" Price filled out the forms as she was directed.

Apparently, Price's degree from Phoenix did not benefit her financially. She was working as a contract administrator at the time she began her studies, and she was still doing substantially the same work ten years after obtaining her degree.

Price's first payment on her consolidated loan was due in August 2006. She did not make payments on the loan, and the Department of Education (DOE) declared her in default in October 2007.

In March 2008, Price filed a "False Certification (Ability to Benefit) Loan Discharge Application" in an effort to get her loans discharged. Essentially, she argued that her student loans should be canceled because the University of Phoenix had falsely certified that she was eligible to receive federal student loans for her studies.

American Student Assistance (ASA), DOE's loan servicer, denied Price's application and told her to produce evidence that she did not have a high school diploma. Price produced her high school transcript, which was prominently stamped "DID NOT GRADUATE" and asked for a hearing.

On June 24, 2009, more than a year after Price produced her high school transcript, DOE affirmed ASA's original decision denying her a loan discharge.  On October 1, 2014--more than six years after she filed her discharge application, DOE issued its final decision denying Price's "false certification discharge application."  A short time later, Price received notice that her wages were subject to being garnished for failure to pay back her student loan. Price then brought suit in federal court.

Statutory and Regulatory Issues Pertinent to Price's case

Under the Federal Family Education Loan Program (FFELP), private lenders make loans to "eligible borrowers" to finance postsecondary studies. The loans are insured by student loan guaranty agencies and reinsured by DOE. Generally, an eligible borrower is someone who has a high school diploma or a GED. 

"However, a 'student who does not have a certificate of graduation from a school providing secondary education, or the recognized equivalent of such certificate,' may qualify for a loan if the school certifies that she has the ability to  benefit from the education it provides." Price v. U.S. Dep't of Educ., 209 F. Supp. 3d 925, 930 (S.D. Tex. 2016) (quoting 20 U.S.C. sec. 1091(d)). 

A school can certify that a student has the ability to benefit from its programs if the student passes an independently administered ATB ("ability to benefit") test.  However, the University of Phoenix did not require Price to take an ATB test.

What is the purpose of the "ability to benefit" rule? Congress adopted "ability to benefit" legislation in 1992, "spurred by public concern over unscrupulous schools exploiting student borrowers who received no benefit from expensive classes of little use." Id. Under federal law (20 U.S.C. sec. 1087(c) (1)), the Department of Education is required to discharge loans taken out by people who were falsely certified as being eligible to receive federal loans by the schools they attended. 

A federal magistrate rules in Price's favor

Price filled out an application to have her loans discharged in 2008, asserting under oath that she did not have a high school diploma at the time she took out federal loans and had not been given an ATB test. End of story, right?

No, DOE refused to discharge her student loans on the grounds that it had no evidence that the University of Phoenix had systematically violated the "ability to benefit" rules. In refusing to forgive Price's loans, a federal magistrate found, DOE violated federal law and DOE's own regulations. In essence, the Magistrate observed, DOE's decision-making process "amounted to a cursory glance at the forest, with no attempt to spot the only tree that mattered."

DOE attempted to defend its decision by offering post hoc rationalizations. In particular, the Department argued that Price obtained a degree from the University of Phoenix and should not be allowed to benefit from that degree without paying for it. But the federal Magistrate rejected that argument, pointing out that Price was entitled to have her loans forgiven whether or not she obtained a degree. 

Furthermore, the Magistrate noted, Price apparently had not benefited from her studies at the University of Phoenix. "Price is doing essentially the same job as before she enrolled, and any psychic benefit from achieving a degree is more than offset by eight years of fending off debt collectors." In any event,  the Magistrate continued, "Congress did not see fit to condition student loan relief upon a showing that the student ultimately failed to graduate." Id. at 934.

Why did DOE deny Price the relief to which she was legally entitled?

Clearly, Price was ill-treated by DOE, which dragged her through a tedious administrative process for six years before ultimately denying her claim.  And, as a federal magistrate concluded, Price was clearly entitled to have her student loans forgiven under federal law and DOE's own regulations.

Why did DOE take the position it did? I can think of only one reason--DOE is so desperate to keep people from getting their loans forgiven that it is willing to ignore federal law. 

DOE is like the fabled Dutch boy with his thumb in the dike. Once a few people are granted relief from their student loans, it will be apparent that millions are entitled to relief. That will lead to a torrent of loan forgiveness, which will cause the federal student loan program to collapse.

References

Price v. U.S. Dep't of Education, 209 Fed. Supp. 3d 925 (S.D. Tex. 2016).

The Protection of Social Security Benefits Restoration Act: Will there be bipartisan support?

Senators Ron Wyden (D-OR) and Sherrod Brown (D-OH) reintroduced the Protection of Social Security Benefits Restoration Act a few days ago. If adopted into law, this bill will stop the federal government from garnishing the Social Security benefits of elderly people who defaulted on their student loans.

This is a good bill, and it deserves bipartisan support.

Late last year, the General Accounting Office released a report on governmental offsets of Social Security benefits. The GAO documented that 173,000 people had their Social Security checks reduced due to defaulted student loans in 2015. This is nearly a five-fold increase from 2002, when only 36,000 people had their Social Security checks reduced for that reason.

Senators Wyden and Brown first introduced this bill in 2015, when it had five additional co-sponsors. This year the bill has 10 additional co-sponsors--all Democrats: Senators Dianne Feinstein (D-CA), Kirsten Gillibrand (D-NY), Patrick Leahy (D-VT), Jim Merkley (D-Or), Bill Nelson (D-FL), Bernie Sanders (D-VT), Elizabeth Warren (D-MA), Sheldon Whitehouse (D-RI), Mazie Hirono (D-HI), and Brian Schatz (D-HI).

Surely this bill will garner widespread support among both Democrats and Republicans. If ever there was a bill that deserves bipartisan support, this is it.

Americans should watch this bill closely to see if it makes its way into law. Any Senator or Congressperson who votes against this bill should be voted out of office. Any federal legislator who tries to delay the bill or prevent it from moving forward should be given the boot.

Admittedly, this bill will only make a small contribution to relieving the suffering of overburdened student-loan debtors. Eight million people have defaulted on their loans and almost 6 million more have been forced into income-driven repayment plans that stretch their payments out for 20 to 25 years. Millions more are not making their loan payments because their loans are in deferment or forbearance.

No reasonable person can argue against passage of the Wyden-Brown bill. If the Protection of Social Security Benefits Restoration Act fails to become law, it will be a sign that our elected representatives cannot work together to solve real and obvious problems, which will mean our country is in real trouble.

Senator Ron Wyden (D-OR)

References

Brown Introduces Bill to Stop Government from Taking Away Social Security Benefits to Pay Off Student Loans. Brown Press Release, May 3, 2017.

Senate Democrats Introduce Bill to Stop the Government From Taking Away Social Security Benefits to Pay Off Student Loans. Wyden Press Release, December 10, 2015.

United States Government Accountability Office. Social Security Offsets: Improvement to Program Design Could Better Assist Older Student Borrowers with Obtaining Permitted Relief. Washington DC: Author, December 2016).

ECMC n v. Acosta-Conniff: Just because you made some bad decisions doesn't disqualify you from discharging your student loans in bankruptcy

Alexandra Acosta-Conniff (Conniff), a single mother of two and an Alabama school teacher, took out student loans to further her education; and she eventually obtained a Ph.D. degree from Auburn University.  She made some payments on her loans, but she put them in deferment for several years due to her low income and her family situation.

Interest accrued on the loans while they were in deferment, and by the time Conniff filed for bankruptcy, her loan balance had grown to $112,000.  In 2013, Conniff filed an adversary action against Educational Credit Management Corporation, seeking to discharge her student loans in bankruptcy.

At the trial on her adversary complaint, Conniff (who argued her case without a lawyer), presented evidence that her expenses slightly exceeded her income and that she was only able to make ends meet by getting financial aid from her parents.

ECMC opposed bankruptcy relief, arguing Conniff should be put into an income-driven repayment plan. ECMC also maintained that Conniff had discretionary income she could devote to making loan payments because she made voluntary payments of $220 a month to her retirement plan.

Judge William Sawyer, an Alabama bankruptcy judge, applied the three-part Brunner test to Conniff's circumstances and concluded that she passed all three parts. First, she was unable to pay off her loans and maintain a minimal standard of living for herself and her children. Second, additional circumstances existed showing that it was unlikely that her financial circumstances would improve during the loan-repayment period. Finally, Judge Sawyer was convinced that Conniff had handled her student loans in good faith.

In deciding Conniff's case, Sawyer, wrote that he was familiar with teachers' pay levels in Alabama, and he considered it unlikely that Conniff's pay as a teacher would increase significantly in the years to come. The judge estimated that Conniff's working life would extend no more than 15 years and that she would be unable to repay her student loans in that time period. Thus, Judge Sawyer discharged Conniff's loans in their entirety.

ECMC appealed to a U.S. District Court, arguing that Judge Sawyer had misapplied the Brunner test. Judge W. Keith Watkins, who heard the appeal, sided with ECMC and specifically found that Conniff failed Brunner's second prong because she had not demonstrated additional circumstances showing that it was unlikely she could repay her student loans in the future.

Essentially, Judge Watkins expressed disapproval of Conniff's decision to obtain a Ph.D. "[Judge Watkins] opined that Conniff has only herself to blame for incurring student debt in the pursuit of multiple degrees that she should have known would not lead to an increase in income sufficient to cover the debt."

Adopting a censorious tone, Judge Watkins said this:

Although [Conniff] is not satisfied with the pay the advanced degrees ultimately have yielded, Conniff chose to earn four degrees, funded primarily by student loans, in her preferred career path of education with a general understanding of the benefits she wold obtain from the degrees versus the costs. She admits specifically that she decided to obtain another student loan to earn her pinnacle Ph.D. in special education and agreed to repay it, knowing how the cost of the Ph.D. compared with the increase in pay it would provide. Conniff finds herself in circumstance largely of her own informed decision-making, which although not dispositive is a consideration.

Conniff, who by now had obtained excellent legal counsel in the person of retired bankruptcy judge Eugene Wedoff, appealed the district court's decision to the Eleventh Circuit Court of Appeals. There, she was more fortunate.  The Eleventh Circuit panel reversed Judge Watkin's opinion and remanded Conniff's case for further consideration.

The Eleventh Circuit specifically disapproved of Judge Watkin's conclusion that Conniff failed the second prong of the Brunner test because she "ha[d] only herself to blame" for her student-loan predicament. In the Eleventh Circuit panel's view, this was the wrong way to interpret Brunner's second prong. Thus, the Eleventh Circuit instructed:

[T]he second prong [of Brunner] is a forward-looking test that focuses on whether a debtor has shown her inability to repay the loan during a significant portion of the repayment period. It does not look backward to assess blame for the student debtor's financial circumstances. Thus, even if the court concludes that a debtor has acted recklessly or foolishly in accumulating her student debt, that does not play into an analysis under the second prong. Nor should it be considered on remand in analysis of that prong. [emphasis supplied] 

The Eleventh Circuit decision (which was not published) is not an outright win for Conniff. She must return to the district court to enable Judge Watkins to reconsider her situation under the Brunner test in accordance with the Eleventh Circuit's directive. But it is a good decision overall, not only for Conniff, but for many other student-loan debtors in bankruptcy.

Let's face it. Millions of distressed student debtors are indebted up to their eyeballs by student loans at least partly because they made some questionable decisions. Perhaps they obtained their degrees from expensive for-profit colleges instead of enrolling in a more reasonably priced public institution. Maybe they chose professions that will not lead to high-paying jobs. Perhaps they changed majors midway through their studies and incurred additional costs.

But the Eleventh Circuit of Appeals has ruled that judges should not examine a debtor's past when determining future ability to repay student loans. The second prong of the Brunner test "is a forward-looking test" and "does not look backward to assess blame." 

Thus, although the Eleventh Circuit's decision in Acosta-Conniff v. ECMC did not rule decisively in favor of cancelling Conniff's debt, she can take comfort from the fact that the lower court will consider her circumstances without blaming her for going to graduate school.

 References

Acosta-Conniff v. ECMC [Educational Credit Management Corporation], 536 B.R. 326 (Bankr. M.D. Ala. 2015), reversed, 550 B.R. 557 (M.D. Ala. 2016), reversed and remanded, No. 16-12884, 2017 U.S. App. LEXIS 6746 (11th Cir. Apr. 19, 2017).

ECMC [Educational Credit Management Corporation v. Acosta Conniff], No. 16-12884, 2017 U.S. App. LEXIS 6746 (11th Cir. Apr. 19, 2017) (unpublished opinion).

ECMC [Educational Credit Management Corporation] v. Acosta-Conniff, 550 B.R. 557 (M.D. Ala. 2016), reversed and remanded, No. 16-12884, 2017 U.S. App. LEXIS 6746 (11th Cir. Apr. 19, 2017).

Richard Fossey & Robert C. Cloud. Tidings of Comfort and Joy: In an Astonishingly Compassionate Decision, a a Bankruptcy Judge Discharge the Student Loans of an Alabama School Teacher Who Acted as Her Own Attorney. Teachers College Record, July 20, 2015. ID Number: 18040.

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