Friday, October 16, 2015

All Student Loan Debtors Should Read Natalie Kitroeff's Recent Online Article in BloombergBusiness.Com

Every distressed student-loan debtor should read Natalie Kitroeff's recent article in about Murphy v. U.S. Department of Education and Educational Credit Management Corporation, now pending before the First Circuit Court of Appeals.  And any student-loan debtor who is trying to discharge a student loan in bankruptcy should read the amicus brief filed in that case by the National Consumer Law Center and the National Association of Consumer Bankruptcy Attorneys.

The essence of the Murphy case can be summarized in a few words. Robert Murphy took out federal PLUS loans (student loans taken out by parents to pay their children's college costs), but he lost his job as the president of a manufacturing firm.  He's been unemployed for 13 years--too old, he says, to find comparable employment and overqualified for lower-paying jobs in his field.

Today, Murphy is 65 years old, and his total student-loan indebtedness has grown to almost a quarter of a million dollars due to accumulated interest. He and his wife are living on an income of $15,000 a year, which his wife earns working as a teachers aide.

Murphy filed for bankruptcy, seeking relief from his PLUS loans, but a bankruptcy court refused to discharge the debt. Like so many debtors who try to shed their student loans in bankruptcy, Murphy is acting as his own attorney.  His case is now on appeal before the First Circuit.

Murphy hopes to persuade the First Circuit to abandon the harsh Brunner test for determining when it would be an "undue hardship" for insolvent debtors to be forced to repay their student loans. That test requires debtors to show that they cannot repay their student loans and maintain a minimal standard of living, that their financial circumstances aren't likely to change soon, and that they made good faith efforts to repay their loans.

In the Ninth Circuit BAP Court's Roth decision, Judge Pappas filed a concurring opinion arguing that the Brunner test no longer makes sense. He pointed out that the Brunner test was devised at a time when student-loan debtors could discharge their student loans without restriction after a relatively short period of time--after five or seven years.

Today, Judge Pappas explained, student-loan debtors hold a trillion dollars in outstanding student-loan debt. And Congress amended the Bankruptcy Code so that insolvent debtors must prove "undue hardship" no matter when they file for bankruptcy, even if it is decades after the loans were taken out.

John Rao, attorney for the National Consumer Law Center, filed a brilliant amicus brief in support of Murphy, arguing that the Brunner test should be overturned. Rafael Pardo, a nationally renowned legal scholar from Emory Law School, also filed an amicus brief in support of Murphy's position.

If the First Circuit rules in Murphy's favor, bankruptcy might become a viable option for millions of distressed student-loan debtors. And if that happens, the world will turn upside down for the federal government, the federal student-loan program, and the colleges and universities that have feasted off of student-aid money without regard to whether their students could pay off their student loans.

Kitroeff's article pointed out that total outstanding indebtedness has doubled in just seven years. At the current rate of growth, total indebtedness will double again within 10 years, ballooning to well over two trillion dollars.

Let's all say a prayer for Robert Murphy and the two amicus attorneys who came to his aid: John Rao and Rafael Pardo. Ten million people are now delinquent on their student loans or are in default, and nine million more hold deferments or forbearances that temporarily excuse them from making payments.  Almost 4 million people are making payments under income-based repayment plans, which means total indebtedess for most of them is going up, not down, because their loan payments don't cover accruing interest.

This situation can't go on forever, and Robert Murphy may be the guy that ushers in relief for millions of fellow sufferers.  If you are a student-loan debtor in bankruptcy, you must read the amicus briefs in the Murphy case and get the arguments made in those briefs before your bankruptcy judge. Mr. Murphy, Mr. Rao, and Mr. Pardo are on the side of the angels, and I think their arguments will be persuasive to many bankruptcy judges around the United States regardless of what the First Circuit does.


Amicus Brief filed by National Consumer Law Center and National Association of Consumer Bankruptcy Attorneys in Support of Appellant (Robert Murphy) in Murphy v. U.S. Department of Education & Educational Credit Management Corporation. (Written by John Rao, esq.) Accessible at:

Amicus Brief filed by Rafael Pardo, arguing for reversal of District Court's decision in Murphy v. U.S. Department of education and Educational Credit Management Corporation. Accessible at:

Natalie Kitroeff. This Court Case Could Unshackle Americans From Student Debt., October 8, 2015. Accessible at:

Thursday, October 15, 2015

Kelly v. Sallie Mae & Educational Credit Management Corporation: Fees, Interest and Penalties Are Dragging Down Student-Loan Debtors

Some policy experts argue that there is no crisis in the student loan program. Most students borrow only modest amounts of money, they say. The people who owe more than $100,000 are just a tiny fraction of the 41 million student-loan borrowers.

But this argument fails to take into account interest, penalties, and fees that borrowers accumulate if they run into financial trouble and can't make their loan payments.  Some distressed borrowers obtain economic-hardship deferments or forbearances that excuse them from making payments. But the fees and interest that accrue over time can double, triple, or even quadruple the size of their loan balance. When that happens, they are doomed.

And here's a case that illustrates my point: Kelly v. Sallie Mae, Inc. (2015). Laura Kelly borrowed about $24,000 to pay for her undergraduate degree in political science at Seattle University. She made payments for eight years, but she ran into financial trouble and filed for bankruptcy in 2008.

By the time Kelly entered bankruptcy, her debt had more than QUADRUPLED to $105,000 due to collection fees and accumulated interest. She filed an adversary proceeding to clear this debt, and a bankruptcy court gave her a partial discharge. The court concluded that Kelly was unable to pay off her loans, that her financial situation was not likely to improve soon, and that she had acted in good faith in the way she had handled her indebtedness.

Sallie Mae and Educational Credit Management Corporation, perhaps the most ruthless of the federal government's debt collectors, appealed the bankruptcy court's decision; and a federal district court reversed. The district court upheld the lower court's conclusion that Kelly could not pay back the hundred grand and still maintain a minimal standard of living. And it upheld the conclusion that Kelly's financial situation would not improve soon.

But the district court reversed the bankruptcy court's conclusion that Kelly had acted in good faith. The district court thought Kelly should have explored alternative payment plans, including a Public Service loan-payment program. And it also believed she could cut her expenses and make some sort of loan payment.  "In short," the district court ruled, "Ms. Kelly made no effort, much less good faith effort, to repay her loans."

Proceeding without a lawyer, Kelly appealed the district court's opinion to the next level: the Ninth Circuit Court of Appeals. The Ninth Circuit, considerably more compassionate than the district court, reversed the district court's decision and reinstated the bankruptcy court's partial discharge. This is what the Ninth Circuit said:
The bankruptcy court justified its conclusion that Kelly had acted in good faith with reference to its findings that, among other things, Kelly had maximized her income, had incurred only marginally excessive expenses, paid thousands of dollars toward her student debt over an eight year period before filing for bankruptcy, and at least minimally investigated payment alternatives such as debt consolidation, deferment, and a federal loan repayment program. . . . Moreover, though Kelly did not pursue loan repayment options, the bankruptcy court did not clearly err in its conclusion that Kelly had a good-faith belief that she was ineligible for the program, and that applying for the program would have been futile since she could not afford the payments after consolidation. 
The Ninth Circuit's Kelly decision is significant for three reasons:

1) First, Kelly successfully fought Sallie Mae and Educational Credit Management Corporation, two of the federal government's most sophisticated and relentless  debt collectors, without a lawyer all the way to the Ninth Circuit.  But look how long the process took. Kelly filed for bankruptcy in 2008, and the Ninth Circuit didn't issue its opinion until 2015. Most debtors wouldn't have the stamina for a seven-year court fight, which is what ECMC and Sallie Mae are counting on. Thus, Kelly should be saluted as a hero for fighting ECMC and Sallie Mae for so long.

2) Second, the Kelly decision is one of a string of recent federal appellate court decisions that ruled in favor of student-loan debtors. Kelly is not as significant as the Ninth Circuit BAP Court's Roth decision or the Seventh Circuit's Krieger decision. Nevertheless, by upholding the bankruptcy court's decision to grant Kelly some relief, the Ninth Circuit has signaled that it will support compassionate bankruptcy courts that rule in favor of student-loan debtors if those rulings are grounded in solid fact findings.

3) Third, and most importantly, Kellv v. Sallie Mae & ECMC dramatically demonstrates how penalties, accumulated interest, and collection fees can turn a manageable debt into a nightmare.  Kelly only borrowed $24,000 to pay for her college education. By the time she arrived in bankruptcy court, the debt had quadrupled in spite of the fact that she had made loan payments for eight years.

Kelly's case is not unusual. I know a student-loan debtor who borrowed around $80,000 to attend graduate school and made payments totally approximately $40,000. The Department of Education now says he owes $315,000!

Our government has designed a student-loan program that is totally insane. For many students, it is the fees, penalties and accumulated interest that are sinking them--not the amount of the original debt.


Educational Credit Management Corporation v. Kelly, 2012 U.S. Dist. LEXIS 56052 (Bankr. W. D. Wash. 2012), reversed, Kelly v. Educational Credit Management Corporation, 594 Fed. App. 413 (9th Cir. 2015).

Kelly v.Sallie Mae, Inc. & Educational Credit Management Corporation, 594 Fed. App. 413 (9th Cir. 2015).

Natalie Kitroeff. Loan Monitor Is Accused of Ruthless Tactics On Student Debt. New York Times, January 1, 2014. Accessible at:

Krieger v. Educational Credit Management Corporation, 713 F.3d 882 (9th Cir. 2013).

Roth v. Educational Credit Management Corporation, 409 B.R. 908 9th Cir. BAP 2013).  

Tuesday, October 13, 2015

When You Reach the Broken Promised Land: Student-Loan Debtors Have Much in Common with Undocumented Immigrants

                             When you reach the broken promised land
                             And every dream slips through your hands
                             Then you'll know that it's too late to change your mind
                             'Cause you've paid the price to come so far
                             Just to wind up where you are
                             And you're still just across the borderline 
Across the Borderline                              
Ry Cooder, John Hiatt & Jim Dickinson
Across the Borderline is perhaps the most powerful of the musical border laments, even more stirring than Woodie Guthrie's immortal song, Deportees (Plane Wreck at Los Gatos). No one with an ounce of human empathy can listen to Willie Nelson's rendition of Across the Borderline and not be moved by the suffering and hardship that so many of our Mexican immigrants have experienced.

Recently, as I reflected on the lyrics of this song, it occurred to me that it could serve just as well as a lament for our nation's distressed student-loan debtors. Indeed, much like our Mexican immigrants, millions of young Americans from disadvantaged backgrounds have tried to "cross the borderline" to economic prosperity by borrowing money to enroll in our nation's colleges. And like our Mexican immigrants, many college students have paid a high price only to see their dreams slip away and to wind up "just across the borderline" with thousands of dollars of student-loan debt that they are unable to repay.

Ten million Americans have defaulted on their student loans or are delinquent in their loan payments. Another 4 million have signed up for long-term repayment plans that can last up to 25 years.  And about 9 million have gotten deferments or forbearances that give them only temporary relief from making loan payments while the interest on their indebtedness piles up month by month.

Why haven't our politicians addressed this calamity? 

I'll tell you why. We've become a nation run by oligarchs who are making money on the federal student loan program. The private equity groups who own most of the for-profit colleges are getting rich. Our public universities are feasting off of Pell grant money and student loans, and they get their federal dollars whether or not students benefit from their college experiences. Our politicians are getting campaign contributions from the people who who want to preserve the status quo, and so-called non-profit corporations are collecting big fees to manage loan portfolios stuffed with promissory notes signed by 41 million student-loan debtors.

In fact, our nation's distressed student-loan debtors are treated exactly like undocumented immigrants. Both are derided as scofflaws and deadbeats, even though most of these people want nothing more than to be productive and to make a decent living for their families. And both groups are exploited. Undocumented immigrants are working in the construction trades and the hospitality industry for substandard wages, and college students are borrowing millions in order to pay exorbitant tuition fees to get education and training that doesn't lead to good jobs. 

Both groups cry out for justice. But they won't get justice because too many powerful people like things just they way they are. 

Image result for undocumented immigrants

Monday, October 12, 2015

Reflections on Gretchen Morgenson's Recent New York Times Column on Student-Loan Processing Companies

Gretchen Morgenson is the New York Times' best columnist. Week after week, she writes with clarity and precision about the shady dealings of our nation's financial industry.  In fact, in some issues, Morgenson's column is the only writer worth reading in the Sunday Times.

Thus, I was pleased when I opened the Business Section of yesterday's Sunday Times and saw Morgenson's column on the student-loan servicing industry. As she pointed out, the U.S.  government pays 11 companies a total of $600 million a year to service millions of student loans. And these companies are doing a terrible job.

A recent report by the Consumer Financial Protection Bureau, which Morgenson summarized, analyzed numerous complaints by student-loan borrowers. The loan servicing companies are giving out misinformation, failing to record loan payments properly, and failing to tell borrowers about payment options that might help them stay out of default.

In short, it's a mess. I hope Ms. Morgenson digs deeper into the activities of the loan servicing companies.  Here are some questions I have: Who are the senior executives of these companies: Navient, Discover Bank, Great Lakes, and the rest? What is the annual compensation of the fat cats who run the companies  that are mishandling the loan-collection process?  Are these companies making campaign contributions to key federal legislators? If so, which Congresspeople are getting the money, and how much?

And I would really like Ms. Morgenson to turn her attention to Educational Credit Management Corporation, the most prominent company that opposes bankruptcy relief for student-loan debtors. The Times recently published a story about ECMC's ruthless tactics in the bankruptcy courts,  and it ran another story about ECMC's tactics in the Roth case, involving an elderly woman with chronic health problems who was living on Social Security checks of less than $800 a month.

How much does ECMC's CEO make? We know that former CEO Richard Boyle made $1.1 million in 2010. What is the current CEO's annual compensation to run a company that hounds oppressed student-loan debtors? And to whom is ECMC making campaign contributions?

A lot of good investigative reporting needs to be done about the student-loan industry. And Gretchen Morgenson is probably the best person to do it. Go for it, Gretchen!


Tara Siegel Bernard. Judges Rebuke Limits On Wiping Out Student Loan Debt. New York Times, July 17, 2015.

Natalie Kitroeff. Loan Monitor Is Accused of Ruthless Tactics on Student Debt. New York Times, January 1, 2014.

Gretchen Morgenson. A Student Loan System Stacked Against the Borrower. New York Times, October 9, 2015. Accessible at

John Hechinger. Taxpayers Fund $454,000 Pay for Collector Chasing Student Loans., May 15, 2013. Accessible at:

Wednesday, October 7, 2015

23 million people are being "eaten alive" by Federal Student Loan Program: Even the New York Times is Getting Worried

Today, the New York Times editorialized once again on the student loan crisis. The Times criticized the student-loan servicing companies for doing a poor job of counseling distressed student-loan debtors. As a result of poor guidance, the Times charged, many debtors don't know that they are eligible for income-based repayment plans that could lower their monthly loan payments.

Writing in response to a recent report by the Consumer Financial Protection Bureau, the Times said this:
The Bureau's report--drawn from 30,000 public comments filed with the agency from May to July--suggests that some [student-loan] servicers are actually pushing struggling borrowers toward default by giving them misinformation, by making it difficult for them to refinance at lower interest rates and by withholding valuable information about affordable payment plans that are in the struggling borrower's best interest.
The Times is right to say that the government's loan processors are doing a crummy job of counseling student-loan debtors. Nevertheless, it fails to grasp the fact that income-based repayment plans--which the Obama administration and the Times both favor--are not a solution to the student-loan crisis.

These plans can last as long as 25 years, and most people who select this option will be making payments so small that their loan balances will actually go up because loan payments are not large enough to cover accruing interest. In fact, the Times editorial acknowledged this fact.

As the Times pointed out, 10 million people have either defaulted on their student loans or are in delinquency. But this figure understates the size of the crisis. In addition to the 10 million cited by the Times, 3.9 million are in income-based repayment plans, and another 9 million people are not paying down their loans because they obtained deferments or forbearances that excuse them from making loan payments.

In short, 23 million people are weighed down by student loans they can't pay back.

The Times said the Feds have come up with a plan "that they believe will prevent borrowers from being eaten alive."  But what is that plan? Basically, the federal government wants the loan servicers to make stronger pitches for long-term income-based repayment options.

This is a cowardly response to the student-loan crisis. The Times and the Feds think this enormous problem can be swept under the rug by enticing millions of people to make student-loan payments over 20 or 25 years instead of 10.

But that won't work. The Department of Education admitted a few months ago that more than half of the people who are enrolled in income-based repayment plans failed to file their annual income statements,which is a condition of participation.  People simply don't want to report their income to the Department of Education on an annual basis in return for the privilege of paying on their student loans for a majority of their working lives.

Department of Education insiders know that the federal student-loan program is heading toward disaster, but they are not trying to fix it. They are simply hoping to postpone the crisis until after the next presidential election.

Hey, is that Arne Duncan?


Editorial, "Why Student Debtors Go Unrescued." New York Times, October 7, 2015, A 26.

Tuesday, October 6, 2015

A Brookings Institution Blogger Asks a Very Good Question: "How well do default rates reflect student loan repayment?"

Robert Kelchen, posted a blog essay on the Brookings Institution's "Brown Center Chalkboard" that asks a very good question: "How well do default rates reflect student loan repayment?'

Kelchen pointed out that "just over half" of the $623 billion in Direct Loans made to students who have entered repayment are  current on their loan payments. Borrowers  with approximately $111 billion in student-loan debt are delinquent or in default.  And borrowers owing another $180 billion are in deferment or forbearance.  In other words, borrowers holding about 46 percent of outstanding Direct Loans aren't making payments.

People whose loans are  in deferment or forbearance aren't counted as defaulters.  But interest is accruing for most of these people, which means their loan balances are getting larger and more difficult to repay.

Kelchen makes several important points in his blog essay, but the most important point is this: "Cohort rates substantially underestimate the percent of students who have been unable to lower their loan balances." And here's the money quote:
Of the nearly 5,700 colleges with data on both [cohort default rates] and repayment rates, the median college had a 14.9 percent three-year [cohort default rate] while 40.8 percent of students did not repay any principal in the first three years after leaving college.  This means that one in four exiting students was not in default, yet did not make a dent in their loan balance in the first three years after entering repayment.
What does this mean?   First of all, a three-year default rate of nearly 15 percent is alarming in itself. But the fact that a quarter of non-defaulting student-loan borrowers did not reduce their loan balances by even a dollar three years after beginning the repayment phase is truly frightening. Those people are not counted as defaulters as long as they retain their  forbearance or deferment status,but their loan balances are getting bigger with each passing month. In short, a lot of people who are currently excused from making loan payments will never pay off their student loans.

When we reflect on the implications of Kelchen's essay along with an earlier Brookings Institution report showing that nearly half of people who attended for-profit colleges default within five years of beginning repayment, we get some sense of the magnitude of the student-loan crisis.

It's time for the Department of Education, Congress and the American public to face this fact: student-loan forbearance options, loan deferment options, and long-term income-based repayment plans are all ways to hide from reality, which is this: millions and millions of people are holding billions of dollars in student-loan debt, which they can't pay off.

And since the Bankruptcy Code makes loan forgiveness so onerous, millions of suffering people will be burdened with this debt for the rest of their lives.

Let's face it, 21st century America is not much different from 18th century England.  Our country doesn't put debtors in prison or deport them to Australia; it just lets them dangle on the outskirts of the American economy until the day they die.

Image result for unemployed


Robert Kelchen. How well do default rates reflect student loan repayment? Brookings Institution, The Brown Center Chalkboard, September 30, 2015. Accessible at:

Friday, October 2, 2015

Goodbye, Arne Duncan. We Hardly Knew Ye. The Secretary of Education Is Leaving Higher Education in a Mess

Arne Duncan is stepping down as Secretary of Education in December. Like all good politicians, Arne knows when it's time to slip out the door and look for a new gig.

Duncan is a photogenic guy and he says everything the progressive community wants to hear. But he did not have the moral courage to clean up the federal student loan program, and he is leaving American higher education in a mess. Duncan didn't do anything substantive to relieve the suffering of millions of people who have  been ripped off by the for-profit college sector. And he didn't do enough to rein in colleges that have high student-loan default rates and low graduation rates.

So where does the nation stand regarding federal student loans? First of all, Americans are carrying at least $1.3 trillion in outstanding student-loan debt (including private student loans, which is perhaps 10 percent of the total).

At least 7 million people are in default, and another 3.9 million are in long-term repayment plans that can stretch payments out for as long as 25 years. A great many of people in these plans will never pay off the principal on their loans.

Of course, the epicenter of the disaster is the for-profit college sector. According to a report released recently by the Brookings Institution, almost half of the people who borrowed money to attend for-profit colleges default within five years of beginning repayment.

And as I have said before, the true magnitude of this train wreck has been hidden from the public because millions of former students have received economic-hardship deferments that relieve them from making loan payments without being counted as a defaulter. The public really has no idea what the true cost of the federal-loan fiasco is.

Moreover, in spite of the fact that the entire higher education industry is heavily dependent on federal student-aid money, a lot of colleges are struggling. Moody's estimates that the number of colleges that are closing will triple by 2017.  True--Moody's estimate translates into only 15 colleges closing in that year, a small percentage of the more than 2000 colleges; but Moody's estimate is probably over-optimistic. The whole private sector is slashing tuition to attract students, so that the actual price of tuition is only about half the sticker price that colleges are advertising.

The higher education industry and its sycophants continually assure the public that all is well. People who graduate from college make more than high-school graduates, we are repeatedly told. We also hear that college costs haven't really gone up that much when inflation is taken into account and we calculate how much colleges are discounting their tuition prices. And we are also told that most of the defaulters owe small amounts of money, so rising college tuition isn't the heart of the problem.

All these excuses carry a certain amount of truth, but the fact remains that millions of people have had their credit ruined, their career hopes dashed, and their dreams of financial security destroyed by borrowing money to attend college that they are unable to pay back.

These millions have only one real route toward a second chance in life--discharge of their loans in bankruptcy. But the Department of Education opposes almost all efforts to discharge student loans in the bankruptcy courts other than people who have catastrophic health problems. In fact, DOE--Arne Duncan's DOE--opposed bankruptcy relief for a quadriplegic student-loan debtor who held a job but was unable to provide for himself and pay the full-time caregiver that he needed in order to survive.  And DOE had unleashed its lackey, Educational Credit Management Corporation, to hound debtors in the bankruptcy court. ECMC is as ruthless  as a character from a Dickens novel, but Duncan did nothing to bring this outfit under control.

So goodbye, Arne Duncan; and good riddance. I'm sure he will toddle off to a cushy university job where he will be working for one of the elite and over-priced institutions that benefited from the shameful federal student-loan program.

But Arne is still young enough to be forced to appear at a congressional hearing ten years from now, when irate Congresspeople will be asking questions about the student-loan bubble that ultimately burst. I can envision him flanked by high-priced lawyers; and I can hear the cameras clicking while he reads his prepared statement to cranky legislators glaring at him over their bifocals.  I'm sure he will be just as glib on that day as he is today, and I'll bet he'll be wearing a nice suit.

Obama administration resignations and firings


Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at:

Kellie Woodhouse, Closures to Triple. Inside Higher Education, September 25, 2015

Kellie Woodhouse. Discounting Grows Again. Inside Higher Education, August 25, 2015.