A few months ago, Steve Rhode posted a thought-provoking blog titled "The Student Loan Bubble That Many Don't Want to See." He argued that student-loan indebtedness is in a bubble that will soon burst, creating two huge problems:
First, when the student-loan market collapses, postsecondary education will be out of reach for most people, which will "put a drag on the overall economy as fewer and fewer people will be able to pay for tuition that outpaces inflation."
Second, a sharp contraction in federal student-loan revenue along with a shrinking student base will force many colleges to cut tuition, putting them under enormous financial stress. Rhode predicts that "[m]any schools, public and private, will fail."
Mr. Rhode sees a parallel between the the student loan program and the overheated housing market that led to a global financial crisis in 2008. Just as financiers packaged home mortgages into mortgage-backed securities called ABS, the banks have bundled student loans into so-called SLABS, or student-loan asset backed securities.
The home-mortgage market went into free fall when investors woke up to the fact that the ratings services (Moody's, Fitch, etc.) had rated ABS as investment grade when in fact a lot of them were junk because they were packed with mortgages that were headed for default.
Now we see Moody's and Fitch downgrading SLABS based on the fact that student borrowers are not paying off their loans as investors expected. More than 5 million borrowers have signed up for income-driven repayment plans that lower monthly loan payments and stretch out the repayment period from 10 years to 20 or even 25 years. SLABS investors now don't know when or how much they are going to be paid on their investments.
Some policy commentators reject the notion that the student-loan market is in a bubble. In a book published last year, Beth Akers and Matthew M. Chingos wrote: "Student loans have a zero chance of becoming the next housing crisis because the market is too small and essentially functions as a government program rather than a market." Akers and Chingos point out that student debt represents only 10 percent of overall consumer debt while home mortgages accounts for 70 percent of household indebtedness.
Personally, I think Steve Rhode is right: Higher education is sustained by a student loan bubble that the nation's colleges and universities refuse to see. In fact, there are eerie similarities between the housing market before it crashed in 2008 and the current level of student-loan indebtedness.
First, higher education at many colleges and universities is wildly overpriced, just as the housing market was overpriced in the early 2000s. This is particularly true in the for-profit sector and at private liberal arts colleges.
As as been widely reported, liberal arts colleges are now discounting tuition for freshman students by almost 50 percent--a clear sign that their posted tuition prices are too high. And for-profit colleges are seeing enrollment declines. University of Phoenix, for example, has seen its enrollments drop by about half over the past 5 years.
Second, the monitoring agencies for both markets failed to do their jobs. As illustrated in the movie The Big Short, the financial ratings agencies rated mortgage backed securities as investment grade when in fact those bundled mortgages included a lot of subprime mortgages.
Likewise, the Department of Education reports three-year default rates for student loans that vastly understates how many student borrowers are failing to pay back their loans. DOE recently reported that about 10 percent of the most recent cohort of student borrowers defaulted within three years. But the five-year default rate is 28 percent; and the five-year default rate for a recent cohort of students who attended for-profit schools is a shocking 47 percent.
And of course the government's vigorous effort to get distressed student borrowers into income-driven repayment plans also helps hide the true default rate. A high percentage of people who enter IDRs are making loan payments so low that they will never pay off their loans.
In short, Steve Rhode's analysis is correct. A rising level of student-loan debt has created a bubble; and the bubble is going to burst. Colleges raised tuition prices far above the nation's inflation rate, knowing that students would simply take out larger student loans to pay their tuition bills. Millions of Americans paid too much for their postsecondary education and can't pay back their loans.
So far, the Department of Education has hidden the magnitude of this crisis, but the game will soon be up. Colleges are closing at an accelerating rate, stock prices for publicly traded for-profit colleges are down, and long-term default rates are shockingly high.
It is true, as Akers and Chingos pointed out, that the student-loan market is not nearly as large as the home-mortgage market when it crashed in 2008. But Akers and Chingos fail to acknowledge the enormous human cost that has been imposed on millions of Americans who took out student loans in the hope of getting an education that would lead to a better life.
Instead, all many Americans got by taking out student loans is an enormous debt load that they can't pay off or discharge in bankruptcy. Eight million Americans have defaulted on their student loans; 5.6 million are in income-driven repayment plans that stretch their payment obligations out for as long as 25 years, and millions more are playing for time by putting their loans in forbearance or deferment.
References
Beth Akers and Matthew Chingos. Game of Loans: The Rhetoric and Reality of Student Debt. (Princeton, NJ: Princeton University Press, 2016).
Anamaria Andriotis. Debt Relief for Students Snarls Market for Their Loans. Wall Street Journal, September 23, 2015.
Patrick Gillespie. University of Phoenix has lost half its students. CNN Money, March 25, 2015.
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).
Steve Rhode. The Student loan Bubble That Many Don't Want to See. Get Out of Debt Guy, July 15, 2016.
Amy Thielen. Declines at For-Profit Colleges Take a Big Toll on Their Stocks. The Street, May 8, 2015.
Kellie Woodhouse. Discounting Grows Again. Inside Higher Ed, August 25, 2015.
Sunday, January 8, 2017
Friday, January 6, 2017
Globe University and Minnesota School of Business are closing: We need federal legislation to manage college shutdowns
Globe University and Minnesota School of Business (MSB) began closing their campuses last month. The two for-profit institutions once operated in three states--Minnesota, South Dakota, and Wisconsin; but a series of regulatory and court actions brought them down.
In September, a Minnesota court ruled that Globe and MSB committed fraud by inducing students to enroll in their criminal justice programs. Not long after, the Department of Education cut them off from federal student-aid funding. No for-profit college can survive a month without federal student-loan revenue, so DOE's action amounted to a death sentence for both institutions.
The demise of Globe and MSB follow in a train of college shutdowns over the past couple of years. The casualty lists includes Corinthian Colleges and ITT, two for-profits that declared bankruptcy. St. Catharine College and Dowling College also shut their doors, along with Virginia Intermont College.
DOE has more than 500 colleges on its "heightened cash monitoring" watch list, and many of these schools will shut down within the next three or four years. In a 2015 report, Moody's Investment Services predicted colleges would close at the rate of 15 per year commencing this year.
Now is the time for Congress to pass legislation to protect colleges' former students when the institution they attended shuts down. At a minimum, Congress should do the following:
I. Congress should pass legislation requiring every defunct college to deposit all student records in a central federal depository.
First student records at failed colleges must be preserved. Former students will need access to their official transcripts for decades after their alma mater closes, but how will they get those transcripts 25 years after the institution they attended shut its doors?
Currently, some closing colleges are voluntarily making arrangements to preserve student records. Dowling College, for example, which filed for bankruptcy in 2016, sent its student records to nearby Long Island University.
But not all closing colleges will act as responsibly as Dowling. In particular, colleges that are accused of defrauding their students have no incentive to preserve student records because those records might be used against them in legal proceedings.
Congress needs to adopt legislation that requires every college that receives federal funds to send all student records, including transcripts, to a federal records depository in the event of a closure. And colleges should be required to digitize their student records according to a standardized protocol so that the process of transferring records after a college closes can be done quickly and efficiently.
II. Non-operating colleges should forgive any loans owed to them by former students.
Most nonpublic colleges depend on federal student aid money for the bulk of their revenues, but some also lend money directly to their students. For example, Globe and MSB loaned money to their students at interest rates as high as 18 percent. According to a Minnesota court decision, the two institutions loaned money to approximately 6,000 students between 2009 and 2016.
Globe and MSB will be defunct in a matter of weeks, but the loans they made to students are debts they may try to collect. Federal law should require every college that loans money to students to forgive those loans if the college closes. As a matter of simple justice, a college that shuts down shouldn't be chasing after students who owe it money.
III. Congress should ease the path to bankruptcy relief for students who attended for-profit colleges.
Finally, Congress needs to streamline the loan-forgiveness process for students who attend for-profit colleges and received no economic benefit from the experience. It is particularly unjust for students to be on the hook for student loans taken out to attend a for-profit college that closed after being found guilty of fraud.
Under DOE regulations, students can apply to have their student loans discharged if they can make one of two showings: 1) they were induced to enroll based on fraud, or 2) they took out loans to attend a college that closed while they were enrolled or within 120 days of being enrolled.
Unfortunately, the administrative process for resolving discharge applications is slow and entirely inadequate to deal with the potential volume of claims. After all, Corinthian Colleges and ITT, which are both in bankruptcy, have around a half million former students between them.
Currently, the Bankruptcy Code bars debtors from discharging student loans in bankruptcy unless they can show that paying back their loans would create an "undue hardship." Most bankruptcy courts have interpreted the undue hardship standard harshly, making it incredibly difficult for most college borrowers to clear their student loans through the bankruptcy process.
Congress should pass legislation that eliminates the undue hardship standard for all people who took out loans to attend a for-profit college and wound up broke. The five-year default rate for a recent cohort of students who attended for-profit colleges is 47 percent--a clear indication that a lot of people got no benefit from attending a for-profit institution.
Conclusion: The Nation faces a swelling tide of college closures and needs an orderly process for shutting down higher education institutions.
One thing is certain: colleges are closing at an accelerating rate; and the Nation need an orderly process to minimize the harm to defunct colleges' former students. Student records must be safeguarded, student debt to failed institutions should be wiped out, and Congress needs to amend the Bankruptcy Code to allow former for-profit college students to obtain bankruptcy relief.
References
Christopher Magan. Globe U. and Minnesota School of Business to start closing campuses. Twin Cities Pioneer Press, December 21, 2016.
Rick Seltzer. Virginia Intermont's campus sale begs question of how colleges close accounts. Inside Higher Ed, January 5, 2017.
State of Minnesota v. Minnesota School of Business, 885 N.W.2d 512 (Minn. Ct. App. 2016).
Alia Wong. Farewell to America's Small Colleges, Atlantic, October 2, 2015.
In September, a Minnesota court ruled that Globe and MSB committed fraud by inducing students to enroll in their criminal justice programs. Not long after, the Department of Education cut them off from federal student-aid funding. No for-profit college can survive a month without federal student-loan revenue, so DOE's action amounted to a death sentence for both institutions.
The demise of Globe and MSB follow in a train of college shutdowns over the past couple of years. The casualty lists includes Corinthian Colleges and ITT, two for-profits that declared bankruptcy. St. Catharine College and Dowling College also shut their doors, along with Virginia Intermont College.
DOE has more than 500 colleges on its "heightened cash monitoring" watch list, and many of these schools will shut down within the next three or four years. In a 2015 report, Moody's Investment Services predicted colleges would close at the rate of 15 per year commencing this year.
Now is the time for Congress to pass legislation to protect colleges' former students when the institution they attended shuts down. At a minimum, Congress should do the following:
I. Congress should pass legislation requiring every defunct college to deposit all student records in a central federal depository.
First student records at failed colleges must be preserved. Former students will need access to their official transcripts for decades after their alma mater closes, but how will they get those transcripts 25 years after the institution they attended shut its doors?
Currently, some closing colleges are voluntarily making arrangements to preserve student records. Dowling College, for example, which filed for bankruptcy in 2016, sent its student records to nearby Long Island University.
But not all closing colleges will act as responsibly as Dowling. In particular, colleges that are accused of defrauding their students have no incentive to preserve student records because those records might be used against them in legal proceedings.
Congress needs to adopt legislation that requires every college that receives federal funds to send all student records, including transcripts, to a federal records depository in the event of a closure. And colleges should be required to digitize their student records according to a standardized protocol so that the process of transferring records after a college closes can be done quickly and efficiently.
II. Non-operating colleges should forgive any loans owed to them by former students.
Most nonpublic colleges depend on federal student aid money for the bulk of their revenues, but some also lend money directly to their students. For example, Globe and MSB loaned money to their students at interest rates as high as 18 percent. According to a Minnesota court decision, the two institutions loaned money to approximately 6,000 students between 2009 and 2016.
Globe and MSB will be defunct in a matter of weeks, but the loans they made to students are debts they may try to collect. Federal law should require every college that loans money to students to forgive those loans if the college closes. As a matter of simple justice, a college that shuts down shouldn't be chasing after students who owe it money.
III. Congress should ease the path to bankruptcy relief for students who attended for-profit colleges.
Finally, Congress needs to streamline the loan-forgiveness process for students who attend for-profit colleges and received no economic benefit from the experience. It is particularly unjust for students to be on the hook for student loans taken out to attend a for-profit college that closed after being found guilty of fraud.
Under DOE regulations, students can apply to have their student loans discharged if they can make one of two showings: 1) they were induced to enroll based on fraud, or 2) they took out loans to attend a college that closed while they were enrolled or within 120 days of being enrolled.
Unfortunately, the administrative process for resolving discharge applications is slow and entirely inadequate to deal with the potential volume of claims. After all, Corinthian Colleges and ITT, which are both in bankruptcy, have around a half million former students between them.
Currently, the Bankruptcy Code bars debtors from discharging student loans in bankruptcy unless they can show that paying back their loans would create an "undue hardship." Most bankruptcy courts have interpreted the undue hardship standard harshly, making it incredibly difficult for most college borrowers to clear their student loans through the bankruptcy process.
Congress should pass legislation that eliminates the undue hardship standard for all people who took out loans to attend a for-profit college and wound up broke. The five-year default rate for a recent cohort of students who attended for-profit colleges is 47 percent--a clear indication that a lot of people got no benefit from attending a for-profit institution.
Conclusion: The Nation faces a swelling tide of college closures and needs an orderly process for shutting down higher education institutions.
One thing is certain: colleges are closing at an accelerating rate; and the Nation need an orderly process to minimize the harm to defunct colleges' former students. Student records must be safeguarded, student debt to failed institutions should be wiped out, and Congress needs to amend the Bankruptcy Code to allow former for-profit college students to obtain bankruptcy relief.
 |
| Photo credit: Wisconsin Public Radio |
References
Christopher Magan. Globe U. and Minnesota School of Business to start closing campuses. Twin Cities Pioneer Press, December 21, 2016.
Rick Seltzer. Virginia Intermont's campus sale begs question of how colleges close accounts. Inside Higher Ed, January 5, 2017.
State of Minnesota v. Minnesota School of Business, 885 N.W.2d 512 (Minn. Ct. App. 2016).
Alia Wong. Farewell to America's Small Colleges, Atlantic, October 2, 2015.
Tuesday, January 3, 2017
Governor Cuomo proposes free college education at New York's public institutions, but the for-profits and private liberal arts schools will likely oppose this plan
Earlier this week, New York Governor Andrew Cuomo announced his plan to offer a free college education at New York's public colleges and universities for all New York families making $125,000 or less. This plan is nearly identical to the proposal put forward by Hillary Clinton last fall during the presidential campaign.
In a press release, U.S. Secretary of Education John B. King quickly endorsed Cuomo's plan, noting that it is similar to President Obama's proposal for a free community-college education. "I applaud Governor Andrew Cuomo for his leadership in expanding the doors of opportunity for New Yorkers, particularly those who otherwise may not be able to afford [a college education]," King said.
Governor Cuomo's proposal is a sound idea, Hillary Clinton's proposal is a sound idea, and President Obama's proposal for a free community-college education is a sound idea as well. And, contrary to what critics have said about these plans, they are not financially irresponsible.
The federal government already spends $150 billion a year on student aid programs--Pell grants, student loans, work-study programs, etc. The states also spend billions on higher education every year. New York, for example, spends a $1 billion a year in tuition assistance for the state's students.
If all this money was dedicated toward offering a free college education at public colleges and universities, taxpayers might actually save money. But none of these plans will work if the federal and state governments continue to subsidize the for-profit college industry and private nonprofit colleges.
If Governor Cuomo's plan moves forward, you can expect to see for-profit and nonprofit colleges oppose it. Catharine Hill, president of Vassar College, came out against free college tuition in a New York Times op ed essay last year--back when Bernie Sanders was the only politician endorsing the idea. And New York's association of private colleges has already expressed skepticism about Governor Cuomo's free tuition plan.
The next six months will be a time of great turmoil for higher education. A number of for-profit colleges have closed or gone bankrupt, and many more are hanging on by their fingernails, hoping the Trump administration treats them more kindly than the Obama administration did during its waning days. Several nonprofit liberal arts colleges have closed as well and more are on the brink of closing.
If the for-profit college industry collapses and the nonprofit college sector shrinks dramatically, then proposals to offer a free college education at public colleges might actually work. But they will not work if federal and state governments continue to prop up the nonpublic college sector with public money.
References
Catharine Hill. Free Tuition Is Not the Answer. New York Times, November 30, 2015, p. A23.
Jesse McKinley. Cuomo Proposes Free Tuition at New York State Colleges for Eligible Students. New York Times, January 3, 2017.
Rick Seltzer. Free Tuition Idea Revived. Inside Higher Ed, January 4, 2017.
U.S. Department of Education Press Release. U.S. Education Secretary John B. King Jr.'s statement on New York Gove. Andrew Cuomo's free college tuition proposal. U.S. Department of Education, January 3, 2017.
In a press release, U.S. Secretary of Education John B. King quickly endorsed Cuomo's plan, noting that it is similar to President Obama's proposal for a free community-college education. "I applaud Governor Andrew Cuomo for his leadership in expanding the doors of opportunity for New Yorkers, particularly those who otherwise may not be able to afford [a college education]," King said.
Governor Cuomo's proposal is a sound idea, Hillary Clinton's proposal is a sound idea, and President Obama's proposal for a free community-college education is a sound idea as well. And, contrary to what critics have said about these plans, they are not financially irresponsible.
The federal government already spends $150 billion a year on student aid programs--Pell grants, student loans, work-study programs, etc. The states also spend billions on higher education every year. New York, for example, spends a $1 billion a year in tuition assistance for the state's students.
If all this money was dedicated toward offering a free college education at public colleges and universities, taxpayers might actually save money. But none of these plans will work if the federal and state governments continue to subsidize the for-profit college industry and private nonprofit colleges.
If Governor Cuomo's plan moves forward, you can expect to see for-profit and nonprofit colleges oppose it. Catharine Hill, president of Vassar College, came out against free college tuition in a New York Times op ed essay last year--back when Bernie Sanders was the only politician endorsing the idea. And New York's association of private colleges has already expressed skepticism about Governor Cuomo's free tuition plan.
The next six months will be a time of great turmoil for higher education. A number of for-profit colleges have closed or gone bankrupt, and many more are hanging on by their fingernails, hoping the Trump administration treats them more kindly than the Obama administration did during its waning days. Several nonprofit liberal arts colleges have closed as well and more are on the brink of closing.
If the for-profit college industry collapses and the nonprofit college sector shrinks dramatically, then proposals to offer a free college education at public colleges might actually work. But they will not work if federal and state governments continue to prop up the nonpublic college sector with public money.
 |
| Bernie & Andrew Cuomo support free college education at public institutions (photo credit, Sam Hodgson, New York Times) |
References
Catharine Hill. Free Tuition Is Not the Answer. New York Times, November 30, 2015, p. A23.
Jesse McKinley. Cuomo Proposes Free Tuition at New York State Colleges for Eligible Students. New York Times, January 3, 2017.
Rick Seltzer. Free Tuition Idea Revived. Inside Higher Ed, January 4, 2017.
U.S. Department of Education Press Release. U.S. Education Secretary John B. King Jr.'s statement on New York Gove. Andrew Cuomo's free college tuition proposal. U.S. Department of Education, January 3, 2017.
Tuesday, December 27, 2016
Social Security offsets imposed on elderly student-loan defaulters: Heartless and Pointless
You can be young without money but you can't be old without it.
Tennessee Williams
If you are in your late 50s or early 60s, you've probably obtained an estimate for how much Social Security income you will receive when you retire. Most retired Americans depend on their Social Security checks to provide a significant amount of their overall retirement income.
But if you defaulted on a student loan, you may not receive your full Social Security benefit. The government may deduct part of your Social Security income and apply the deduction to your unpaid student loans.
A few weeks ago, the U.S. Government Accountability Office issued a lengthy report (82 pages) on the government's Social Security offset activities. Here are some of the highlights.
- In 2015, 173,000 Americans had their Social Security income offset due to defaulted student loans. This is a dramatic increase from 2002, when the government only applied offsets to 36,000 Social Security recipients (page 11).
- Some Social Security recipients whose income was offset lived below the federal poverty guideline and others dropped below the poverty level after their Social Security checks were reduced (p. 27). In fact, as Senator Elizabeth Warren emphasized in a recent press release, "Since 2004, the number of seniors whose Social security benefits have been garnished below the poverty line increased from 8,300 to 67,300."
- More than 7 million people age 50 and older still owe on student loans, and 870,000 people age 65 and older have student loan debt. Among student-loan borrowers age 65 and older, 37 percent are in default (figure 2, page 10).
- The amount of money the government collects from Social Security offsets is small beer. The government only collected $171 million from Social Security offsets in 2015, about one eighth the amount Hillary Clinton raised for her 2016 presidential campaign ($1.4 billion).
- Most of the money collected from Social Security offsets went toward paying fees and accumulated interest. "Of the approximately $1.1 billion collected through Social Security offsets from fiscal year 2001 through 2015 from borrowers of all ages, about 71 percent was applied to fees and interest" (p. 19).
GAO also reported that several hundred thousand people who have experienced Social Security offsets are totally disabled and entitled to have their student loans forgiven, but only a minority of these people have applied for loan forgiveness (p. 31). Commendably, DOE has suspended offsets for people who are totally disabled whether or not they applied for loan forgiveness. Unfortunately, the government treats the amount of the forgiven debt as taxable income (p. 31).
The GAO report is packed with additional information and findings, but the bottom line is this: The government is hectoring elderly and disabled student-loan defaulters even though the amount of money the government collects is a pittance. Most of the money collected goes toward paying down fees and accumulated interest and does not reduce the individual defaulters' loan balances.
In short, the Department of Education's Social Security offset practices is pointless. Elderly or disabled people who defaulted on their student loans and are surviving on their Social Security checks will never pay off their loans.
Sandy Baum, a widely renowned expert on student loans, recommended in her recent book that the government stop offsetting the Social Security checks of defaulted student-loan debtors. Does anyone disagree?
In fact, the government's Social Security offset practices strike me as an administrative form of sadism--the bureaucratic equivalent of small children who joylessly tear the wings off of insects.
Senator Elizabeth Warren has called for an end to the practice of garnishing student-loan defaulters' Social Security checks. Surely she can gather legislative support for a law that bans this practice. If she can't get that done, then Senator Warren is really not much of a consumer advocate.
References
Sandy Baum. Student Debt: Rhetoric and Realities of Higher Education Financing. New York: Palgrave-MacMillan, 2016.
Senator Elizabeth Warren Press Release, December 20, 2016. McCaskill-Warren GAO Report Shows Shocking Increase in Student Loan Debt Among Seniors.
Sandy Baum. Student Debt: Rhetoric and Realities of Higher Education Financing. New York: Palgrave-MacMillan, 2016.
Senator Elizabeth Warren Press Release, December 20, 2016. McCaskill-Warren GAO Report Shows Shocking Increase in Student Loan Debt Among Seniors.
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).
Wednesday, December 21, 2016
Department of Education's fumbling efforts to aid students defrauded by Corinthian Colleges: No relief for the Walking Dead
David Goldman wrote a highly informative article for Bloomberg yesterday about the Department of Education's fumbling efforts to process Borrower Defense claims filed by people who claim they were defrauded by Corinthian Colleges. I am grateful to Steve Rhode for calling my attention to Goldman's article.
Essentially, here's the story. Corinthian Colleges filed for bankruptcy last year under a cloud of fraud allegations. In fact, the the State of California got a $1.1 billion judgment against Corinthian for its wrongdoing in that state. At the time it filed bankruptcy, Corinthian had 335,000 former students.
DOE has an administrative process whereby it will forgive the student loans taken out by students who were defrauded by for-profit institutions. So far, 82,000 former Corinthian students have filed those claims. But DOE's process for reviewing those claims is slow. Goldman reported that so far only about 15,000 students have gotten debt relief through the Borrower Defense process.
DOE won't grant blanket forgiveness to all of Corinthian's former students, arguing that not all of them were defrauded. But in fact, a high percentage were defrauded. As Goldman reported, "Department officials concluded that Corinthian engaged in 'widesperead placement rate fraud' for almost 800 programs at nearly every one of its more than 100 U.S. campuses."
David Vladek, a former director of the Federal Trade Commission's consumer protection division, said this about Corinthian's former students: "These kids by and large have been scammed, and the Department of Education in some sense is continuing the harm by making them jump through hoops to get the relief to which they are entitled."
But it gets worse. Not only is DOE not processing loan-forgiveness claims quickly, it is actually employing debt collectors to hound Corinthian's former students, even though most of these students are entitled to have their loans forgiven. Although DOE states on its web site that it will stop all loan collection efforts on Corinthian borrowers, that statement is not true.
Indeed, DOE's debt collection activities are a hell of a lot more efficient than their loan forgiveness process. As Maggie Robb, a consumer-rights attorney, observed, " When the Department of Education wants to collect money, it doesn't stop."
Goldman's story focused solely on Corinthian Colleges' former students, but there are hundreds of thousands of people who took out loans to attend for-profit colleges who have been scammed. I know one woman with a documented claim for fraud against DeVry University who filed a Borrower Defense claim with DOE last August and still hasn't gotten a response from DOE.
In short, people who have been defrauded by the for-profit college industry are the real life representations of the Walking Dead. Fraud victims have debt hanging over their heads, which DOE has not discharged; and if they default on their loans they are subject to abusive debt collection tactics, wage garnishment, income-tax offsets, and ruined credit. Many are continuing to make loan payments on debt they don't really owe; and most did not get fair value for their for-profit college experiences.
In DOE's defense, the Department is simply overwhelmed by the implosion of the for-profit college industry. It does not have the resources to process claims by Corinthian students or to even notify those students that they may be entitled to debt relief. ITT's closure and bankruptcy will bring a deluge of new claims, and other for-profits are sure to follow over the next few months. (Globe University and Charlotte School of Law, for example, have been accused of misrepresentation and many of their students will be filing Borrower Defense claims.)
There is really only one sensible solution: DOE should allow all people who borrowed money to attend for-profit colleges and who are insolvent to file for bankruptcy relief in the federal bankruptcy courts. Whether or not a a particular student debtor can prove fraud should be irrelevant. If they took out loans to attend a for-profit college, the odds are better than even that they were scammed or did not get fair value for their money.
Note: All quotations come from Mr. Goldman's article.
References
David Goldman. The U.S. Government Is Collecting Student Loans It Promised to Forgive, Bloomberg News, December 19, 2016.
Essentially, here's the story. Corinthian Colleges filed for bankruptcy last year under a cloud of fraud allegations. In fact, the the State of California got a $1.1 billion judgment against Corinthian for its wrongdoing in that state. At the time it filed bankruptcy, Corinthian had 335,000 former students.
DOE has an administrative process whereby it will forgive the student loans taken out by students who were defrauded by for-profit institutions. So far, 82,000 former Corinthian students have filed those claims. But DOE's process for reviewing those claims is slow. Goldman reported that so far only about 15,000 students have gotten debt relief through the Borrower Defense process.
DOE won't grant blanket forgiveness to all of Corinthian's former students, arguing that not all of them were defrauded. But in fact, a high percentage were defrauded. As Goldman reported, "Department officials concluded that Corinthian engaged in 'widesperead placement rate fraud' for almost 800 programs at nearly every one of its more than 100 U.S. campuses."
David Vladek, a former director of the Federal Trade Commission's consumer protection division, said this about Corinthian's former students: "These kids by and large have been scammed, and the Department of Education in some sense is continuing the harm by making them jump through hoops to get the relief to which they are entitled."
But it gets worse. Not only is DOE not processing loan-forgiveness claims quickly, it is actually employing debt collectors to hound Corinthian's former students, even though most of these students are entitled to have their loans forgiven. Although DOE states on its web site that it will stop all loan collection efforts on Corinthian borrowers, that statement is not true.
Indeed, DOE's debt collection activities are a hell of a lot more efficient than their loan forgiveness process. As Maggie Robb, a consumer-rights attorney, observed, " When the Department of Education wants to collect money, it doesn't stop."
Goldman's story focused solely on Corinthian Colleges' former students, but there are hundreds of thousands of people who took out loans to attend for-profit colleges who have been scammed. I know one woman with a documented claim for fraud against DeVry University who filed a Borrower Defense claim with DOE last August and still hasn't gotten a response from DOE.
In short, people who have been defrauded by the for-profit college industry are the real life representations of the Walking Dead. Fraud victims have debt hanging over their heads, which DOE has not discharged; and if they default on their loans they are subject to abusive debt collection tactics, wage garnishment, income-tax offsets, and ruined credit. Many are continuing to make loan payments on debt they don't really owe; and most did not get fair value for their for-profit college experiences.
In DOE's defense, the Department is simply overwhelmed by the implosion of the for-profit college industry. It does not have the resources to process claims by Corinthian students or to even notify those students that they may be entitled to debt relief. ITT's closure and bankruptcy will bring a deluge of new claims, and other for-profits are sure to follow over the next few months. (Globe University and Charlotte School of Law, for example, have been accused of misrepresentation and many of their students will be filing Borrower Defense claims.)
There is really only one sensible solution: DOE should allow all people who borrowed money to attend for-profit colleges and who are insolvent to file for bankruptcy relief in the federal bankruptcy courts. Whether or not a a particular student debtor can prove fraud should be irrelevant. If they took out loans to attend a for-profit college, the odds are better than even that they were scammed or did not get fair value for their money.
 |
| Students who were scammed by for-profit colleges are the Walking Dead. |
Note: All quotations come from Mr. Goldman's article.
References
David Goldman. The U.S. Government Is Collecting Student Loans It Promised to Forgive, Bloomberg News, December 19, 2016.
Tuesday, December 20, 2016
Charlotte School of Law loses access to federal student aid money: The beginning of the end for bottom-tier law schools?
In less than two weeks, Charlotte School of Law will lose all access to federal student financial aid money. CSL is a for-profit law school with an undistinguished reputation. According to Law School Transparency, an organization that gathers data on American law schools, only 46.3 percent of CSL graduates passed their bar exams in 2015. LST calculates that 50 percent of its 2014 freshman class had credentials so low that they were at extreme risk of failing the bar. LST also reported that not a single one of CSL's 2015 graduates obtained a federal judicial clerkship, another indication of CSL's mediocrity.
The Department of Education's decision to deny student aid money to CSL is probably the school's death knell. Most of CSL's students must take out student loans to pay CSL's extremely high tuition--about $44,000 a year.
The American Bar Association had already found that the law school was out of compliance with the ABA's accrediting standards, but DOE did not pull the plug on CSL solely for that reason.
Rather, as DOE's press release explained, CSL was found to have made misleading statements about itself to prospective students:
Nevertheless, even if CSL closes, hundreds of the school's graduates will suffer. Most have borrowed a lot of money to attend CSL; few obtained jobs that made the financial investment worthwhile.
DOE needs to do more than just cut off funds from one lower-tier law school. It needs to allow graduates of CSL and similar bottom-feeder law schools to discharge their student loans in bankruptcy.
And then DOE needs to get busy and shut off student aid money to some other law schools that have low admission standards and that are not placing enough of their graduates in well-paying law jobs. Here are some schools DOE needs to examine:
North Carolina Central University
Southern University Law Center
Appalachian School of Law
Florida Coastal School of Law
Ave Maria School of Law
Arizona Summit Law School
LST calculates that these schools admitted students with LSAT scores so low that 50 percent of their 2014 freshman class were at extreme risk of failing the bar exam.
And here are some more schools that bear watching:
Florida A & M University
Texas Southern
Mississippi College
Thomas M. Cooley Law School
Valparaiso University
St. Thomas University-Florida
University of North Dakota
Ohio Northern University
University of South Dakota
Barry University
University of La Verne
LST has identified these schools as ones that admit students with LSAT scores so low that 25 percent of their entering 2014 classes were at extreme risk of failing the bar exam.
DOE and the ABA must work together to raise the overall quality of legal education in the United States. As Kyle McEntee, writing for Law School Transparency, observed:
References
Law School Transparency. 2015 State of Legal Education.
Kyle McEntee. Will This Law School Close After Feds Cut Funding? Bloomberg News, December 19, 2016.
U.S Department of Education. Charlotte School of Law Denied Continued Access to Federal Student Aid Dollars. U.S. Department of Education press release, December 19, 2016.
The Department of Education's decision to deny student aid money to CSL is probably the school's death knell. Most of CSL's students must take out student loans to pay CSL's extremely high tuition--about $44,000 a year.
The American Bar Association had already found that the law school was out of compliance with the ABA's accrediting standards, but DOE did not pull the plug on CSL solely for that reason.
Rather, as DOE's press release explained, CSL was found to have made misleading statements about itself to prospective students:
"The ABA repeatedly found that the Charlotte School of Law does not prepare students for participation in the legal profession. Yet CSL continuously misrepresented itself to current and prospective students as hitting the mark," said U.S. Under Secretary of Education Ted Mitchell. "CSL's actions were misleading and dishonest. We can no longer allow them continued access to federal student aid."Without federal student-loan money, CSL won't survive long. And if the school closes, that will be a good thing for the legal profession and all the potential students who might have borrowed money to attend this extremely lackluster institution.
Nevertheless, even if CSL closes, hundreds of the school's graduates will suffer. Most have borrowed a lot of money to attend CSL; few obtained jobs that made the financial investment worthwhile.
DOE needs to do more than just cut off funds from one lower-tier law school. It needs to allow graduates of CSL and similar bottom-feeder law schools to discharge their student loans in bankruptcy.
And then DOE needs to get busy and shut off student aid money to some other law schools that have low admission standards and that are not placing enough of their graduates in well-paying law jobs. Here are some schools DOE needs to examine:
North Carolina Central University
Southern University Law Center
Appalachian School of Law
Florida Coastal School of Law
Ave Maria School of Law
Arizona Summit Law School
LST calculates that these schools admitted students with LSAT scores so low that 50 percent of their 2014 freshman class were at extreme risk of failing the bar exam.
And here are some more schools that bear watching:
Florida A & M University
Texas Southern
Mississippi College
Thomas M. Cooley Law School
Valparaiso University
St. Thomas University-Florida
University of North Dakota
Ohio Northern University
University of South Dakota
Barry University
University of La Verne
LST has identified these schools as ones that admit students with LSAT scores so low that 25 percent of their entering 2014 classes were at extreme risk of failing the bar exam.
DOE and the ABA must work together to raise the overall quality of legal education in the United States. As Kyle McEntee, writing for Law School Transparency, observed:
Charlotte School of Law is not the only law school operating shamelessly to the detriment of the legal profession. This school, like several dozen more, set large percentages of their students up to fail, leaving them with high debts, wasted time, no job, and no hope. It’s long past time for these schools to go.ABA needs to rescind accreditation for some of these schools, and DOE needs to cut off federal funding for at least a dozen more law schools.
References
Law School Transparency. 2015 State of Legal Education.
Kyle McEntee. Will This Law School Close After Feds Cut Funding? Bloomberg News, December 19, 2016.
U.S Department of Education. Charlotte School of Law Denied Continued Access to Federal Student Aid Dollars. U.S. Department of Education press release, December 19, 2016.
Thursday, December 15, 2016
Defrauded students file debt-relief applications with the Department of Education: Bankruptcy courts can provide relief faster and more efficiently than DOE bureaucrats
When Betsy DeVos takes over as the new Secretary of Education next year, she will inherit one huge headache--thousands of pending applications for loan forgiveness from students who claim they were defrauded by various for-profit universities.
As Andrew Kreighbaum explained in a recent article for Inside Higher Ed, the Department of Education had received 80,000 loan discharge applications as of last October; and the total number has likely grown to at least 100,000.
So far, DOE has approved 15,694 applications for discharge from students who attended three campuses owned by the now defunct Corinthian Colleges system, but many more of Corinthian's former students are surely eligible for loan forgiveness based on fraud claims. After all, Corinthian has 350,000 former students.
And there are hundreds of other student borrowers who may file loan-forgiveness applications: students from ITT Tech Services, Globe University, Minnesota School of Business, and several more for-profits that closed after being accused of wrongdoing.
I. Problems with forgiving loans through the DOE administrative process
DOE has been extremely slow to process borrower defense applications; I know one young woman who filed her application in August based on a claim she was defrauded by DeVry University. She has yet to receive a response from DOE.
New federal regulations for processing borrower defense claims will become effective next summer, but there are several fundamental challenges that new regulations won't solve:
Fortunately, there is a solution to these problems; it's called the bankruptcy courts.
First, debtors whose student loans are discharged in bankruptcy will not suffer tax consequences for a forgiven loan because under current IRS rules forgiven debts are not taxable to an individual who is insolvent at the time the loan is forgiven.
Second, a student debtor who discharges student loans from a for--profit college through the bankruptcy process will not forfeit credits or degrees conferred by the college.
Finally, the bankruptcy courts clearly have the resources to process hundreds of thousands of bankruptcy petitions filed by distressed student-loan debtors. Filing an individual Chapter 7 action is relatively simple and does not require a lawyer. Bankruptcy petitions could be routinely resolved in the bankruptcy courts, which have the expertise to weed out fraudulent or unworthy claims.
III. DOE has the authority to reinterpret the "undue hardship" standard
Critics might argue that my proposal is unworkable because anyone seeking to discharge student loans in bankruptcy must meet the "undue hardship" standard, a very difficult standard to meet. But there is a solution for that challenge as well.
All DOE needs to do to ease the path to bankruptcy relief for insolvent student-loan debtors with fraud claims is to write an official letter expressing its view that every insolvent debtor who attended a for-profit college that has been found to have acted fraudulently meets the undue hardship standard.
In essence, such a letter would be a a revision of DOE's letter issued on July 7, 2015, giving the Department's interpretation of the "undue hardship" rule. In all likelihood, the bankruptcy courts would defer to DOE's revised interpretation of "undue hardship" and begin discharging student loans routinely.
Of course, DOE would also need to direct the various student-loan guaranty agencies to stop opposing bankruptcy relief for any insolvent debtor with a fraud claim against a for-profit college.
Easing the path to bankruptcy relief for distressed debtors who took out student loans to attend dodgy for-profit colleges will cost taxpayers billions. But most of the people who took out these loans will never pay the money back anyway. Almost 50 percent of the people who took out loans to attend for--profit colleges default on those loans within five years. Others enter into income-driven repayment plans that lower monthly payments, but according to the Government Accountability Office, about half the people who begin these plans are kicked out for failing to verifying their income on an annual basis.
So let's begin cleaning up the mess our government created when it began shoveling federal student-aid money to the rapacious for-profit college industry. Let's shut these colleges down and wipe out the student-loan debt accumulated by millions of victims of massive fraud. Incoming Secretary of Education Betsy DeVos will have the authority to grant relief to these victims by easing the path toward bankruptcy. Let's hope this is what she does.
References
Andrew Kreighbaum. Activists and borrowers call on Obama administration to provide debt relief to defrauded students. Inside Higher Ed, December 14, 2016.
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: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults
Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015.
Eric Rosenberg.You Need to Know How Student Loan Forgiveness Is Taxed. Studentloanhero.com, July 18, 2016.
US. Government Accounting Office. Federal Student Loans: Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates. Washington, DC: U.S. Government Accounting Office, November, 2016.
As Andrew Kreighbaum explained in a recent article for Inside Higher Ed, the Department of Education had received 80,000 loan discharge applications as of last October; and the total number has likely grown to at least 100,000.
So far, DOE has approved 15,694 applications for discharge from students who attended three campuses owned by the now defunct Corinthian Colleges system, but many more of Corinthian's former students are surely eligible for loan forgiveness based on fraud claims. After all, Corinthian has 350,000 former students.
And there are hundreds of other student borrowers who may file loan-forgiveness applications: students from ITT Tech Services, Globe University, Minnesota School of Business, and several more for-profits that closed after being accused of wrongdoing.
I. Problems with forgiving loans through the DOE administrative process
DOE has been extremely slow to process borrower defense applications; I know one young woman who filed her application in August based on a claim she was defrauded by DeVry University. She has yet to receive a response from DOE.
New federal regulations for processing borrower defense claims will become effective next summer, but there are several fundamental challenges that new regulations won't solve:
1. Tax consequences. First, all former for-profit student who have their student loans forgiven will have a one-time tax liability because the amount of their forgiven loans is considered taxable income by the IRS.
2. Forfeiture of college credits. Under the current debt-relief program, students whose student loans are forgiven due to fraud will forfeit any credits they received from the institution they attended.II Bankruptcy is a better way to process loan forgiveness applications
3. Insufficient DOE resources. Third, the Department of Education simply doesn't have the resources to process thousands of loan forgiveness claims in a timely manner, not to mention the thousands of new claims that will inevitably be filed as more for-profit colleges close their doors.
Fortunately, there is a solution to these problems; it's called the bankruptcy courts.
First, debtors whose student loans are discharged in bankruptcy will not suffer tax consequences for a forgiven loan because under current IRS rules forgiven debts are not taxable to an individual who is insolvent at the time the loan is forgiven.
Second, a student debtor who discharges student loans from a for--profit college through the bankruptcy process will not forfeit credits or degrees conferred by the college.
Finally, the bankruptcy courts clearly have the resources to process hundreds of thousands of bankruptcy petitions filed by distressed student-loan debtors. Filing an individual Chapter 7 action is relatively simple and does not require a lawyer. Bankruptcy petitions could be routinely resolved in the bankruptcy courts, which have the expertise to weed out fraudulent or unworthy claims.
III. DOE has the authority to reinterpret the "undue hardship" standard
Critics might argue that my proposal is unworkable because anyone seeking to discharge student loans in bankruptcy must meet the "undue hardship" standard, a very difficult standard to meet. But there is a solution for that challenge as well.
All DOE needs to do to ease the path to bankruptcy relief for insolvent student-loan debtors with fraud claims is to write an official letter expressing its view that every insolvent debtor who attended a for-profit college that has been found to have acted fraudulently meets the undue hardship standard.
In essence, such a letter would be a a revision of DOE's letter issued on July 7, 2015, giving the Department's interpretation of the "undue hardship" rule. In all likelihood, the bankruptcy courts would defer to DOE's revised interpretation of "undue hardship" and begin discharging student loans routinely.
Of course, DOE would also need to direct the various student-loan guaranty agencies to stop opposing bankruptcy relief for any insolvent debtor with a fraud claim against a for-profit college.
Easing the path to bankruptcy relief for distressed debtors who took out student loans to attend dodgy for-profit colleges will cost taxpayers billions. But most of the people who took out these loans will never pay the money back anyway. Almost 50 percent of the people who took out loans to attend for--profit colleges default on those loans within five years. Others enter into income-driven repayment plans that lower monthly payments, but according to the Government Accountability Office, about half the people who begin these plans are kicked out for failing to verifying their income on an annual basis.
So let's begin cleaning up the mess our government created when it began shoveling federal student-aid money to the rapacious for-profit college industry. Let's shut these colleges down and wipe out the student-loan debt accumulated by millions of victims of massive fraud. Incoming Secretary of Education Betsy DeVos will have the authority to grant relief to these victims by easing the path toward bankruptcy. Let's hope this is what she does.
 |
| Incoming Secretary of Education Betsy DeVos |
References
Andrew Kreighbaum. Activists and borrowers call on Obama administration to provide debt relief to defrauded students. Inside Higher Ed, December 14, 2016.
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: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults
Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015.
Eric Rosenberg.You Need to Know How Student Loan Forgiveness Is Taxed. Studentloanhero.com, July 18, 2016.
US. Government Accounting Office. Federal Student Loans: Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates. Washington, DC: U.S. Government Accounting Office, November, 2016.
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