Tuesday, July 17, 2012

The Underemployed Law School Graduate With Massive Student-Loan Obligations: The Hedlund Bankruptcy Case

Almost 37 million people owe money on their college loans, and millions are in default or behind on their loan payments (Brown et al. 2012). Most overburdened student-loan debtors suffer their college-loan debt in silence, and the public is generally unaware of their plight. In a few cases, however, student-loan debtors file for bankruptcy, seeking a discharge from the loan obligations. Often the court decisions in these cases provide details of a particular student-loan debtor’s financial situation.  In particular, the Hedlund case (2012) provides a window into the world of the underemployed law-school graduate who is swamped by massive student-loan obligations.
A Young Man Borrows Money to Go to Law School But Can’t Pay Back the Loans
In the early 1990s, Michael Eric Hedlund borrowed more than $85,000 to go to law school. It must have seemed like a good idea at the time. Michael’s father and brother were attorneys, and he anticipated going to work in his father’s law firm.
Things did not work out as Michael hoped. After graduating from Willamette University’s law school in 1997, Michael took a job in the District Attorney’s office in Klamath Falls, Oregon. He planned to work there for a couple of years and then join his father’s law firm. Unfortunately, Michael failed the bar exam twice. Unable to practice law, he received several extensions on his loan obligations. He applied for a student-loan consolidation, but was told he was ineligible for consolidation because he was not current on his loan payments.
In 1999, Michael found a job as a juvenile counselor, which paid him about $40,000 a year.  His monthly loan payments were $800, which he did not pay regularly. In fact, he only made one loan payment.  In 2002, two loan creditors began garnishing his wages; and in May 2003, Michael filed for bankruptcy.
Michael’s bankruptcy proceedings stretched on for years. In fact, the original bankruptcy judge who presided over his case died before the case was resolved. In March 2012--nine years after Michael filed for bankruptcy, a federal district court ruled that Michael was not entitled to discharge his student loans in bankruptcy.  According Judge Ann Aiken, Michael was not entitled to bankruptcy relief because he had not made a good-faith effort to pay on his loans.
The Pathetic Plight of Many Law School Graduates
Although Judge Aiken rejected Michael’s plea to have his student loans discharged, she was not unsympathetic.  Judge Aiken pointed out that law school tuition rose more than three hundred percent between 1989 and 2009, which is twice the rate of inflation for that period and four times the rate of job growth. “Accordingly,” Judge Aiken observed, “with the exception of the independently wealthy, students must take out loans in order to finance their [law] degrees” (p. 907).
Meanwhile, as tuition costs keep going up, wages for beginning attorney are going down. Citing a report by the National Association for Law Placement, Judge Aiken pointed out that annual compensation for first-year associate attorneys in private practice went down in 2010.  In addition, the demand for new attorneys is shrinking. According to Judge Aiken, “The most recent statistics indicate that, through the year 2018, there will only be 25,000 openings for the law schools’ 45,000 new graduates each year” (p. 907).
In Judge Aiken’s opinion, “[T]he current higher education system is untenable and unsustainable; as a result, increasing numbers of students will be forced to file for bankruptcy” (p. 908). In the judge’s view, the student loan issue--she did not use the word “crisis”--needs to be addressed at a systematic level.
What is the Significance of the Hedlund Case?
Judge Aiken’s opinion in the Hedlund case paints a poignant picture of the plight of underemployed law-school graduate who borrowed heavily to attend law school.  As Judge Aiken pointed out, law school tuitions are now so high that most people must borrow money--a lot of money--to get a legal education. A few years ago, borrowing money to get a law degree was a good bet, but the demand for new lawyers is shrinking and salaries for beginning attorneys are going down.  Thousands of law school graduates are finding themselves underemployed in jobs outside the legal field and unable to pay back their student loans.  Obviously, this is a huge national problem, not only for law-school graduates, but for law schools and for the legal profession as well. 
Under federal bankruptcy law, student-loan debtors cannot discharge their student loans in bankruptcy unless they can show “undue hardship.”  Most law-school graduates are able to find some kind of employment and thus will not qualify for a bankruptcy discharge under this rigorous standard.  Mr. Hedlund, for example, found a non-legal job paying $about 40,000.
Nevertheless, most underemployed law school graduates who have massive student loans will be in dire economic circumstances.  Mr. Hedlund was obligated to pay $800 a month on his loans after he graduated, almost an impossible burden for someone making $40,000 a year.
Unable to discharge their student loans in bankruptcy, a lot of underemployed law-school graduates will be forced to apply for an Income-Based Repayment plan (IBR) in order to manage their loan obligations. Under an IBR, as modified by the Obama administration, debtors will obligate themselves to pay 10 percent of their discretionary income for a period of 20 years (White House, 2012).
Obviously, IBR plans are not an ideal solution for law-school graduates who can’t find well-paying jobs. Instead of beginning good careers practicing law, many graduates will wind up being long-term indentured servants to the government, forking over a percentage of their income over a 20-year period. If Michael Hedlund ultimately chooses the IBR option, he won’t be free of his law-school loan obligations until he is in his 60s.  Somehow, that does not seem fair.
Brown, M., Haughwout, A., Lee, D., & Mabutas, M. (2012). Grading student loans.  Federal Reserve Bank of New York.
Hedlund v. Educational Resources Institute, Inc., 468 B.R. 901 (D. Or. 2012).
White House, Office of Press Secretary (2012, June 6). Fact Sheet: Helping Americans manage student loan debt with improvements to repayment options. Retrieved from: http://www.whitehouse.gov/the-press-office/2012/06/06/fact-sheet-helping-americans-manage-student-loan-debt-improvements-repay

Friday, June 15, 2012

Wacky: A University of Chicago Professor Says Investors Should Finance Students' College Costs for Cut of Future Income

Luigi Zingales,an economics professor at the University of Chicago, recently proposed an innovative way to finance students' college education costs: allow the venture-capital industry to finance students' college education in return for a share of the students' future income. 

This is how Zingales explained his proposal in a recent New York Times essay: "Investors could finance students' education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student's future income--or, even better, a fraction of the increase in her income that derives from college attendance."

Zingales insists that his plan is not a new form of indentured servitude but a way of having the beneficiaries of a college education pay for it--not the taxpayers.

Only an economist from the University of Chicago could come up with such a wacky idea.

A few comments:

First, contrary to Professor Zingales's assertion, the plan is indeed a modern form of indentured servitude, whereby the rich finance the education of  the poor for a share of the poor person's future wages. 

Second, until recently, most Americans considered a college education as a benefit not only for the degree holder but for society at large. We all grow richer when we enable people to become more productive through becoming better educated.  Thus, it makes sense for our society to invest in higher education and to broaden opportunities for people to earn college degrees. To suggest that venture capitalists--not the taxpayers--should finance students' college costs negates the American philosophy of public education, which is to make it available to everyone and to at least partially subsidize it so that no one is excluded based on poverty.

The federal student loan program is indeed in crisis, but we won't end the crisis with oddball ways to finance it cooked up by economics professors. We saw what happened to the housing market when the venture capitalists got involved with it.  Why would we want venture capitalists mucking up higher education?

Friday, June 8, 2012

Thanks, NY Times, for Another Tepid Editorial About the Student Loan Crisis

In The Big Lebowski, Bunny Lebowski tells the Dude that her boyfriend is a nihilist. "He doesn't care about anything," she explains.

The Dude, Donny and Walter:
"That must be exhausting," the Dude replies sympathetically.

This scene reminds me of the New York Times editorial writers. Every day, they go to work and pen editorials opining on all the world's problems: global warming, the crisis in the Middle East, the European Debt crisis, obsesity--it must be exhausting!

Of course, not all of the Times' editorial advice is useful.  Earlier this week, a Times editorial, entitled "College's True Cost," commended the Obama administration's efforts to get colleges to communicate more clearly with students about the cost of attending college. As the Times reported approvingly, "[t]he Obama administration is developing a standardized form" that all colleges can use to report on how much a year of college costs and estimating the monthly payments students will owe when paying off their student loans.

"Unfortunately," the Times concluded, "colleges are unlikely to embrace this forthright approach unless the federal government makes it mandatory." Right. More government regulations will solve all our problems.

Obviously, givng students more information about their student-loan obligations is a good thing. But giving students clearer information about their student-loan debt burden is not going to solve the student-loan crisis any more than telling people how many calories are in a Big Mac will solve the nation's obesity crisis. People are still going to buy those Big Macs and students are still going to take out college loans because most of them can't afford to attend college without borrowing a lot of money.

Solving the student-loan debt crisis is going to take more than the creation of a standardized form for colleges to give students when they dole out student-loan money. As I've said before, these things must be done:
  • The Department of Education must stop hiding the true student-loan default rate and give the public more accurate reports on how many people have stopped paying on their student loans.
  • Insolvent student-loan debtors must be given reasonable access to the bankruptcy courts.
  • The Federal government must stop financing the for-profit schools and colleges, which have extraordinarily high student-loan default rates.
  • Colleges must operate more efficiently and rein in their costs.
Unless these things are done, other reform tactics are just a cosmetic approach to a very serious national problem.


Editorial (2012, June 7). College's true cost. New York Times, p. A24.

Thursday, June 7, 2012

The Federal Government Should Stop Bankrolling the For-Profit College Industry

Floyd Norris recently wrote a mild but provocative article in the New York Times that focused on ITT Educational Services, a for-profit corporation that offers post-secondary education programs in 48 states. Norris reported that ITT students pay an average cost of $48,000 in tuition and fees to receive a two-year associate's degree in business administration.

Of course students can obtain a two-year associate's degree from a public community college for a fraction of that cost. One would think the federal government would develop policies to encourage students to attend reasonably priced community colleges instead of supporting the for-profit college industry.

As has been widely reported, for-profit colleges enroll about 10 percent of all post-secondary students but get about 25 percent of the federal student-aid money. According to Norris, the federal government guaranteed nearly $24 billion in loans for students attending for-profit schools in 2010-2011 and  distributed nearly $9 billion in grants that went to for-profit institutions.

Without question, most of the for-profit colleges could not exist without federal student-aid money.  For example, in 2011, ITT received 89 percent of its revenues from the federal government in the form of student loans and grants. (Norris, 2012, p. B7)  Meanwhile, state and local-government are drastically cutting their financial support for public colleges and universities.

In my opinion, the federal government should stop funding the for-profit colleges altogether and redirect the money toward public community colleges.  Unfortunately, such a reform is not coming any time soon.  The for-profits pay highly effective lobbyists to protect their interests (Kirkham, 2012), and they make strategic political contributions to key legislators in Washington (Kirkham, 2011).

So this is the situation. Billions of federal dollars flow each year into the coffers of for-profit schools and colleges that educate about 10 percent of the nation's post-secondary students and account for about half of all the student-loan defaults (Kirkham, 2012). Until Congress stops subsidizing the for-profit colleges industry, we will never solve the student-loan crisis, which is growing worse with each passing year.

Kirkham, C. (2012, February 3). Auction 2012: For-profit colleges win when lobbying blitz weakens regs. Huffington Post.   http://www.huffingtonpost.com/2012/02/03/auction-2012-education-for-profit-colleges_n_1251072.html

Kirkham, C. (2011, July 29). John Boehner backed deregulation of online learning, leading to explosive growth at for-profit colleges. Huffington Post. http://www.huffingtonpost.com/2011/07/29/john-boehner-for-profit-colleges_n_909589.html

Norris, F. (2012, May 25). Colleges for profit are growing, with U.S. aid. New York Times, p. B1.

Wednesday, May 23, 2012

Today’s New York Times Editorial About Student Loans is Not Very Useful

Today’s lead editorial in the New York Times is entitled “Full Disclosure for Student Borrowers.” Basically, the Times says that “[c]olleges, lenders and Congress must ensure that students understand their debt burden.”

Pardon me, Mr. and Ms. New York Times editorial writers, but that advice is not very useful. It is true that a lot of student-loan borrowers did not understand the nature of their loan obligations. Some did not realize they had borrowed from private lenders instead of the federal student loan program, for example; and a great many made poor decisions with regard to what they chose to study. People who borrowed a $100,000 or more to pursue degrees in religious studies, sociology, or some other non-remunerative field did not make smart decisions.

But the fact that many students took out college loans without understanding the consequences is only part of the problem. A bigger part of the program is this: The student loan program has spawned a rapacious for-profit college industry, which Congress refuses to regulate. As a whole, this industry has very high student-loan default rates; and many of them are much more expensive than public-college alternatives. Today, the for-profit institutions enroll about 10 percent of all the post-secondary loan borrowers but they receive about 25 percent of the Federal student aid money.

Another problem is the private student-loan market, which generally charges students higher interest rates than the federal student-loan program and offers students fewer protections like economic hardship deferments. Congress passed legislation that makes it almost impossible for students to discharge their private student loans in bankruptcy, which is an outrage.

If the New York Times wishes to offer useful advice about solving the trillion-dollar student-loan mess, it needs to endorse the following actions:

More accurate reporting of student-loan default rates by the U.S. Department of Education, particularly the default rate for students enrolled in for-profit schools,
Repeal of the statutes making it nearly impossible for insolvent students to discharge their student loans in bankruptcy,
Passage of effective consumer-protection laws that will protect students from unscrupulous college recruiters and colleges’ misleading representations about job prospects for graduates of post-secondary programs,
Congressional or executive action to stop the federal government and the student-loan guarantee agencies from garnishing elderly defaulters’ Social Security checks.

Perhaps the New York Times has offered more useful information about the student-loan crisis in the past.  But the advice offered on today’s editorial page does not go nearly far enough toward solving a problem that is causing hardship and suffering for millions of people.


Editorial (2012, May 23). Full disclosure for student borrowers. New York Times, p. A20.

Tuesday, May 22, 2012

President Obama Can Do ThreeThings Right Now To Show He Cares About Student Loan Debtors

According to Bloomberg, the Obama campaign has produced a television ad that showcases President Obama's efforts to aid college students.  As president, the ad states, Obama "doubled funding for college grants, capped federal student loan payments, passed the largest college tax credit ever."
President Obama can do three things
 right now to help student-loan debtors
Certainly, President Obama has expressed a genuine interest in helping students fund their college education.  But here are some tangible things President Obama can do immediately to ease the burden on student-loan debtors, a group that has received a lot of media attention recently.

1. Tax Consequences of Forgiven Student Loans. Currently, students whose student loans are forgiven based on disability or because they participated in the Income Contingent Repayment Plan face a federal-income tax bill because the forgiven debt is considered income by the IRS. President Obama could issue an Executive Order or direct the IRS to draft a regulation that would shield people with forgiven student loans from a federal income tax bill.

2. Garnishment of Social Security Checks. In the infamous Lockwood decision, the U.S. Supreme Court upheld the garnishment of Social Security checks of elderly people who defaulted on their student loans. President Obama could simply tell the Department of Education and the student-loan guarantee agencies to stop garnishing Social Security checks as a means of collecting on defaulted loans. 

3. Placing Bankrupt Students in the Income Contingent Repayment Plan.  At the urging of the student-loan agencies, some bankruptcy courts have placed insolvent student-loan debtors in the Income Contingent Repayment Plan, which obligates them to pay a portion of their income toward their student loans for 25 years. The consequence of this maneuver is to deny student-loan debtors the bankruptcy relief that they reasonably deserve.  President Obama could issue an executive order directing the Department of Education and the student-loan guarantee agencies to allow bankrupt student-loan debtors to discharge their college-loan debt in bankruptcy and not ask bankruptcy courts to put these unfortunate people in 25-year repayment plans.

President Obama could do all these things unilaterally without legislation or Congressional approval, and they would not cost taxpayers a significant amount of money. After all, how much money can the Department of Education collect by garnishing people's Social Security checks?

To a certain extent these actions would be merely symbolic; they wouldn't do much to address the huge problem of mounting student loan debt in this country. Nevertheless, if President Obama would do these three things, he would demonstrate his sincere concern about the student-loan debt crisis in a tangible way.  And I think a lot of Americans would appreciate the gesture, including the 37 million people who have outstanding student-loan debt.


Giroux, G. (2012, May 18). Obama campaign ad focuses on higher education. Bloomberg's Political Capital Web Site. http://go.bloomberg.com/political-economy/2012-05-18/obama-campaign-ad-focuses-on-higher-education/

Higher Education Industry to Students: If You Are Crushed by Student Loans, It's Your Own Damn Fault

As Jimmy Buffet reminded us in Wasting Away in Margaritaville, some things are our own damn fault.  Apparently, this is the position of the higher education industry regarding the student loan crisis. 

Jimmy Buffett
When the New York Times published a front page story about students who have been crushed by the burden of their student loans, two higher education industry spokespeople wrote letters to the Times, basically saying everything is fine--thank you.  
Molly Corbett Broad, president of the American Council on Education, suggested that some students need to make better decisions when they take out student loans. “The reality is that every student and family must carefully weigh what they believe a degree is worth against the price of a particular institution.”  And, Broad acknowledged, “If students and their families borrow not with their heads but over them, dire consequences can easily follow.” Yuh think?
And David L. Warren, president of the National Association of Independent Colleges and Universities, pointed out that the default rate for borrowers at private colleges is only 4.6 percent. Both Warren and Broad acknowledged that students might need better counseling regarding their borrowing decisions, but other than that, Warren and Broad had no suggestions for solving the student loan crisis.
What I took away from these letters by the presidents of two high-profile higher-education industry groups is this: We are doing a fine job, higher education is worth the cost, and students who are swamped by their college loans made bad decisions. Or, to paraphrase Jimmy Buffett, if students are overwhelmed by their student loans, it’s their own damn fault.
But let’s look closely at what Broad and Warren said. Warren stated that the default rate at private colleges is only 4.6 percent.  Warren was citing the Department of Education’s figures, which only measures defaulters in the first two years of the loan repayment period. A study that examined the loan default rate for college graduates over a ten year period concluded that the default rate is about 10 percent. I think it is indisputable that the loan default rate for students who attended private colleges is nearly double the rate that Warren cited, when defaults are measured over the life of loan repayment period. And the default rate for students who attended for-profit institutions is absolutely unacceptable—probably at least 30 percent when measured over the entire life of the loan repayment period.
And Broad said that the average student debt load is only $23,000, which Broad seems to think is not particularly onerous. But even $23,000 in student-loan debt is a crushing burden for students who don’t have jobs, students who received no worthwhile skills from their educational experiences, or students who never completed their degrees.
As far as I know, the professional organizations for the higher education industry have not endorsed serious proposals to ease the burden on students who cannot pay back their loans. At a minimum, the National Association of Independent Colleges and Universities and the Council on Education should actively promote these reforms:
·         Legislation that will give insolvent students reasonable access to the bankruptcy courts. 
·         Legal prohibitions against the garnishment of student-loan debtors’ Social Security checks. 
·         More accurate reports from the Department of Education regarding student-loan default rates.
For two top spokespeople for the higher education industry to simply say a college education is a good value and students need to make better decisions about borrowing money is pretty lame. The nation’s colleges and universities need to accept some responsibility for the student-loan mess, and they need to support effective solutions.  
Broad, M. C. (2012, May 190. Letter to the Editor. New York Times, p. 18.
Choy, S. B, & Li, X. (2006). Dealing with debt: Bachelor’s degree recipients 10 years later.  Washington, DC: National Center for Education Statistics. http://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2006156
Fossey, R., & Cloud, R. C. (2011, November 24). From the cone of uncertainty to the dirty side of the storm:  A proposal  to provide student-loan debtors who attended for-profit colleges with reasonable access to bankruptcy court. West’s Education Law Reporter, 272, 1-18.

Martin, A., & Lehren, A. W. (2012, May 12). A generation hobbled by the soaring cost of college. New York Times, p. 1. http://www.nytimes.com/2012/05/13/business/student-loans-weighing-down-a-generation-with-heavy-debt.html?pagewanted=print
Warren, D. L. (2012, May 19). Letter to the Editor. New York Times, p. A18.