The New York Times published an editorial this week strongly criticizing Secretary of Education Betsy DeVos, whom the Times accurately describe as a "shill" for the student-loan industry.
As the Times reported, DeVos' Department of Education has issued a new policy statement that says federal law can preempt state consumer-protection laws aimed at curbing abuses in the loan-servicing and debt-collection business. DeVos' Department argues that state consumer-protection laws can undermine uniform administration of the student loan program.
The Times also criticized the Republican-sponsored bill to reauthorize the Higher Education Act. This bill, if it becomes law, will preempt the right of the states to regulate the student-loan business--including student-loan debt collectors and loan servicers.
Betsy DeVos' craven and servile pandering to the student-loan industry is a scandal; and DeVos--not the Russians--should be the focus of Democratic attacks on the Trump administration. DeVos' behavior belies all the blather coming out of the White House about how Trump policies benefit the middle class. DeVos apparently hopes to remove all restraints on the venal and corrupt student-loan business, which is doing a pretty good job of dismantling the middle class.
In fact, the federal student-loan program is a disaster, with millions of casualties as student borrowers are pushed into default or into long-term repayment plans that never pay off borrowers' loan balances.
Here's what can be done to stop DeVos' mad-dog scheme to line the pockets of her debt-collector cronies:
1) The state attorney generals should sue Betsy DeVos and DOE every time they attempt to dismantle the states' proper role of protecting consumers from fraud. As the Times noted, this is what the state AGs are doing.
2) Other states should follow the example of the Massachusetts Bar Association and the Massachusetts Attorney General and organize teams of volunteer lawyers to represent distressed student-loan debtors in the bankruptcy courts. If just a few more state AGs joined the Bay State--California, Florida, Illinois, and Texas, for example--I believe the bankruptcy courts would begin revising their harsh attitude toward college borrowers in the bankruptcy courts.
3) The Democrats should take every opportunity to question Trump administration officials under oath about the activities of the student-loan guarantee companies who act as DOE's debt collectors. Why do four of these agencies--nonprofit organizations--individually hold $1 billion in assets while they hound elderly debtors in the bankruptcy courts. Let's see a breakdown of the attorney fees these agencies are paying to hire asshole lawyers to crush student-loan debtors.
Everyone of good will should take heart at Fed Reserve Chair Jerome Powell's candid admission that he could not explain why the Bankruptcy Code treats student-loan debtors so harshly--basically putting them in the same category as criminals.
As someone once said, when a thing can't go on forever, it won't. The abuses of the federal student loan program can't go on forever. More than 40 million borrowers collectively owe $1.5 trillion in student loans (including private loans); and about half of these borrowers will never repay their debt.
The Federal Reserve Bank of New York and other agencies have documented that student-loan debt is hurting the economy--preventing people from buying homes and saving for retirement.
The time has come for American society to decide: Do we want to continue enriching a bunch of crooks in the for-profit college business and the debt-collecting racket or do we want a middle class?
We know Betsy DeVos' answer: she wants to enrich her corrupt buddies even if she helps destroy the middle class.
References
The Student Loan Industry Finds Friends in Washington. New York Times, March 18, 2018.
Robert Shireman and Tariq Habash. Have Student Loan Guaranty Agencies Lost Their Way? The Century Foundation, September 29, 2016.
Wednesday, March 21, 2018
Monday, March 12, 2018
Fed Chairman Jerome Powell says he can't explain why student loans can't be discharged in bankruptcy: An astonishing admission that the emperor wears no clothes
Federal Reserve Chairman Jerome Powell made an astonishing admission at a Senate Banking Committee hearing last month. He said he could not explain why federal law does not allow distressed debtors to discharge their student loans in bankruptcy.
"I think alone among all kinds of debt, we don’t allow student loan debt to be discharged in bankruptcy," Powell said. "I'd be at a loss to explain why that should be the case."
Powell also acknowledged that mounting student indebtedness could injure the American economy. "It’s not something you can pick up in the data right now," Powell told the Banking Committee, "but at this goes on, and as student [debt] gets larger and larger, it absolutely could hold back growth."
Fed Chairman Powell is not the first senior Washington official to admit that the student loan program could hurt the American economy. Former Fed Chair Janet Yellen made a similar observation in 2014. "The [student] debt loads certainly are high enough that they may play a role in, for example, making it hard for people to buy first homes, to build a down payment,” Yellen said at a hearing of the Senate Budget Committee.
But Powell's remarks last month is the first time a senior federal official has candidly admitted that he cannot explain why the Federal Bankruptcy Code makes it very difficult for overburdened college debtors to discharge their student loans through bankruptcy.
In essence, Chairman Powell's surprisingly candid remark is very much like the children's story about the emperor who wore no clothes. Everyone knew the emperor wasn't wearing clothes, but no one was brave enough to state the obvious until a child explained: "The emperor is naked!"
I think Chairman Powell's frank observation may be just the nudge our government needs to honestly address the fact that millions of Americans who took out student loans in good faith simply can't pay them back.
How can the Chairman's remarks be exploited?
I. Alert the bankruptcy judges to the Fed Chair's remarks
First, all student debtors who attempt to their discharge student loans in bankruptcy should notify the bankruptcy judge--either in the complaint itself or in a pleading--that a top economic official in the federal government cannot explain why honest student debtors are barred from shedding their burdensome student loans through bankruptcy.
Powell's observation stands in stark contradiction to the stance taken by the Department of Education and the student-loan debt collectors that have fought bankruptcy relief for almost all student debtors. For example, DOE opposed bankruptcy relief for a quadriplegic debtor in the Myhre case, and Educational Credit Management Corporation (ECMC) fought Janet Roth, an elderly woman in poor health who was living on less than $800 a month, all the way to the Ninth Circuit Bankruptcy Appellate Panel.
How can DOE and ECMC defend their heartless behavior when the Chair of the Federal Reserve says he can't explain why our government puts onerous restrictions on bankruptcy relief for insolvent student debtors? Powell's remark might be just the piece of evidence bankruptcy courts need to begin discharging student loans in bankruptcy under more humane standards than currently prevail.
II. Powell's statement should spur a bipartisan effort in Congress to amend the Bankruptcy Code
Second, Powell's admission should prompt Republicans and Democrats to join in a bipartisan push to amend the Bankruptcy Code to remove the "undue hardship" provision in 11 U.S.C. sec. 523 (a)(8). Representatives Katko and Delaney have filed a bill to remove the "undue hardship" clause from the Bankruptcy Code, but so far the bill has gone nowhere. Senators Warren and McCaskill have introduced a bill to stop the federal government from garnishing Social Security payments to insolvent, elderly student debtors, but that bill too has gone nowhere.
Surely Powell's statement should be all the encouragement Republicans and Democrats need to revise the Bankruptcy Code so that student loans are dischargeable in bankruptcy like any other consumer debt.
References
Joseph Lawler. Federal Reserve chairman: Mounting student debt could hold back economic growth. Washington Examiner, March 1, 2018.
Joseph Lawler. Janet Yellen warns student debt may be holding back housing recovery. Washington Examiner, May 8, 2014.
Representative John Delaney press release. Delaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt. May 5, 2017.
"I think alone among all kinds of debt, we don’t allow student loan debt to be discharged in bankruptcy," Powell said. "I'd be at a loss to explain why that should be the case."
Powell also acknowledged that mounting student indebtedness could injure the American economy. "It’s not something you can pick up in the data right now," Powell told the Banking Committee, "but at this goes on, and as student [debt] gets larger and larger, it absolutely could hold back growth."
Fed Chairman Powell is not the first senior Washington official to admit that the student loan program could hurt the American economy. Former Fed Chair Janet Yellen made a similar observation in 2014. "The [student] debt loads certainly are high enough that they may play a role in, for example, making it hard for people to buy first homes, to build a down payment,” Yellen said at a hearing of the Senate Budget Committee.
But Powell's remarks last month is the first time a senior federal official has candidly admitted that he cannot explain why the Federal Bankruptcy Code makes it very difficult for overburdened college debtors to discharge their student loans through bankruptcy.
In essence, Chairman Powell's surprisingly candid remark is very much like the children's story about the emperor who wore no clothes. Everyone knew the emperor wasn't wearing clothes, but no one was brave enough to state the obvious until a child explained: "The emperor is naked!"
I think Chairman Powell's frank observation may be just the nudge our government needs to honestly address the fact that millions of Americans who took out student loans in good faith simply can't pay them back.
How can the Chairman's remarks be exploited?
I. Alert the bankruptcy judges to the Fed Chair's remarks
First, all student debtors who attempt to their discharge student loans in bankruptcy should notify the bankruptcy judge--either in the complaint itself or in a pleading--that a top economic official in the federal government cannot explain why honest student debtors are barred from shedding their burdensome student loans through bankruptcy.
Powell's observation stands in stark contradiction to the stance taken by the Department of Education and the student-loan debt collectors that have fought bankruptcy relief for almost all student debtors. For example, DOE opposed bankruptcy relief for a quadriplegic debtor in the Myhre case, and Educational Credit Management Corporation (ECMC) fought Janet Roth, an elderly woman in poor health who was living on less than $800 a month, all the way to the Ninth Circuit Bankruptcy Appellate Panel.
How can DOE and ECMC defend their heartless behavior when the Chair of the Federal Reserve says he can't explain why our government puts onerous restrictions on bankruptcy relief for insolvent student debtors? Powell's remark might be just the piece of evidence bankruptcy courts need to begin discharging student loans in bankruptcy under more humane standards than currently prevail.
II. Powell's statement should spur a bipartisan effort in Congress to amend the Bankruptcy Code
Second, Powell's admission should prompt Republicans and Democrats to join in a bipartisan push to amend the Bankruptcy Code to remove the "undue hardship" provision in 11 U.S.C. sec. 523 (a)(8). Representatives Katko and Delaney have filed a bill to remove the "undue hardship" clause from the Bankruptcy Code, but so far the bill has gone nowhere. Senators Warren and McCaskill have introduced a bill to stop the federal government from garnishing Social Security payments to insolvent, elderly student debtors, but that bill too has gone nowhere.
Surely Powell's statement should be all the encouragement Republicans and Democrats need to revise the Bankruptcy Code so that student loans are dischargeable in bankruptcy like any other consumer debt.
 |
| Fed Reserve Chair Jerome Powell |
References
Joseph Lawler. Federal Reserve chairman: Mounting student debt could hold back economic growth. Washington Examiner, March 1, 2018.
Joseph Lawler. Janet Yellen warns student debt may be holding back housing recovery. Washington Examiner, May 8, 2014.
Representative John Delaney press release. Delaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt. May 5, 2017.
Wednesday, March 7, 2018
Alexander Holmes v. National Collegiate Student Loan Trust: Don't co-sign your children's student loans!
In 2006, Alexander Holmes co-signed a student loan with Charter Bank One to fund his son's education at the University of Southern Indiana. Charter Bank sold Holmes' loan in a pool of loans to National Collegiate Funding, which then sold the loan to National Collegiate Student Loan Trust (NCSLT).
Ten years later, NCSLT sued Mr. Holmes, claiming he owed more than $16,000 on the loan plus accrued interest. Holmes denied NCSLT's claim and argued that NCSLT did not have standing to sue him.
NCSLT moved for summary judgment, which an Indiana trial court granted. The court then ordered Holmes to pay NCSLT $18,183.26 plus interest and costs.
But Mr. Holmes had a good lawyer and he appealed. An Indiana appellate court reversed the lower court's order against Mr. Holmes on the grounds that NCSLT had not provided admissible evidence that it had the right to collect on the debt Holmes owed Charter Bank.
The court's reasoning is a bit technical; but this is a summary of the appellate court's decision:
In support of its motion for summary judgment against Mr. Holmes, NCSLT offered the affidavit of Jacqueline Jefferis, an employee of Transworld Systems, Inc. (TSI), which was the "loan subservicer" for U.S. Bank, National Association, which the court identified as the "Special Servicer" working for NCSLT.
In a sworn statement, Ms. Jefferis' said she was familiar with TSI's business practices regarding loan records. But, as the Indiana Court of Appeals pointed out:
Why is the Holmes case, decided by an Indiana state court, important to other student-loan debtors? Three reasons:
I. The private student-loan industry is bundling student loans and selling them to investors
First, the private student-loan industry has been packaging student loans into bundles (or pools) and selling them to third parties, and these third parties often then sell these bundled loans to yet other parties. In fact, these loans can have multiple owners.
In this flurry of transactions, the paperwork often gets mislaid or lost. Sometimes the companies suing student-loan debtors for payment do not have the critical documents necessary to show that they have the legal right to collect on the debt.
This confusion sometimes occurs due to "robo-signing," the mindless signing of documents by people who are not familiar with the original transactions. This was a significant issue during the home-mortgage crisis of 2008, and judges sometimes dismissed home-foreclosure suits because the parties trying to foreclose on houses could not prove they were entitled to grab someone's home.
Thus, anyone who is sued by a company trying to collect on a private student loan should demand that the suing party show that it is the legal entity entitled to sue for the money. Fortunately for Mr. Holmes, NCSLT was unable to show that it was the party that had legal standing to sue him.
II. Student-loan debtors need good lawyers
This brings me to the second reason the Holmes case is significant for other student-loan debtors. Mr. Holmes defeated NCSLT on a technicality. Specifically, NCSLT's documentation did not pass muster with Indiana Evidence Rule 803(6). But only a competent lawyer would know how to make the technical argument that benefited Mr. Holmes.
I once thought that student-loan debtors with the right facts could go into court without lawyers and be successful. And indeed, some debtors have won their cases in federal bankruptcy courts over the ruthless opposition of the debt collectors' lawyers.
But many of these cases turn on legal technicalities that a nonlawyer could not be expected to know. The Holmes case was based on Indiana law, but federal bankruptcy law also has technicalities that nonlawyers will find very difficult to master.
That is why I was heartened by the decision of the Massachusetts Bar Association to organize teams of volunteer lawyers to represent student-loan debtors in bankruptcy courts. If student-loan debtors can get good lawyers, they will have a far better chance of winning their cases than if they go to court without legal counsel.
III. Never co-sign your children's student loans
There's a third lesson to be learned from the Holmes case. Mr. Holmes co-signed a student loan with his son Nicholas to enable Nicholas to enroll at the University of Southern Indiana. In my view, that was a mistake. If Nicholas couldn't figure out a way to attend a regional state university without having his dad co-sign a student loan, then Nicholas needed to figure out another way to go to college.
I've said this before, and I'll say it one more time. Parents should never co-sign their children's student loans. Never. Never. Never.
Note: My thanks to Steve Rhode for calling my attention to Holmes v. NCSLT.
References
Alexander Holmes v. National Collegiate Student Loan Trust (Ind. Ct. App. Feb. 27, 2018).
Steve Rhode. Perfect Example Why Most National College Student Loan Trust Lawsuits are BS. Getoutofdebtguyorg., March 1, 2018.
Ten years later, NCSLT sued Mr. Holmes, claiming he owed more than $16,000 on the loan plus accrued interest. Holmes denied NCSLT's claim and argued that NCSLT did not have standing to sue him.
NCSLT moved for summary judgment, which an Indiana trial court granted. The court then ordered Holmes to pay NCSLT $18,183.26 plus interest and costs.
But Mr. Holmes had a good lawyer and he appealed. An Indiana appellate court reversed the lower court's order against Mr. Holmes on the grounds that NCSLT had not provided admissible evidence that it had the right to collect on the debt Holmes owed Charter Bank.
The court's reasoning is a bit technical; but this is a summary of the appellate court's decision:
In support of its motion for summary judgment against Mr. Holmes, NCSLT offered the affidavit of Jacqueline Jefferis, an employee of Transworld Systems, Inc. (TSI), which was the "loan subservicer" for U.S. Bank, National Association, which the court identified as the "Special Servicer" working for NCSLT.
In a sworn statement, Ms. Jefferis' said she was familiar with TSI's business practices regarding loan records. But, as the Indiana Court of Appeals pointed out:
[T]he Jefferis affidavit provided no testimony to support the admission of the contract between Holmes and Charter One Bank or the schedule of pooled loans sold and assigned to National Collegiate Funding, LLC, and then to NCSLT . . . . There was no testimony to indicate that Jefferis was familiar with or had knowledge of the regular business practices or record keeping of Charter One Bank, the loan originator, or that of NCSLT regarding the transfer of pooled loans . . . . [Emphasis added by me.In other words, as far as the appellate court was concerned, Ms. Jefferis didn't know nuthin' about no loan from Charter Bank to Mr. Holmes. Consequently, the trial court's judgment against Mr. Holmes was reversed.
Why is the Holmes case, decided by an Indiana state court, important to other student-loan debtors? Three reasons:
I. The private student-loan industry is bundling student loans and selling them to investors
First, the private student-loan industry has been packaging student loans into bundles (or pools) and selling them to third parties, and these third parties often then sell these bundled loans to yet other parties. In fact, these loans can have multiple owners.
In this flurry of transactions, the paperwork often gets mislaid or lost. Sometimes the companies suing student-loan debtors for payment do not have the critical documents necessary to show that they have the legal right to collect on the debt.
This confusion sometimes occurs due to "robo-signing," the mindless signing of documents by people who are not familiar with the original transactions. This was a significant issue during the home-mortgage crisis of 2008, and judges sometimes dismissed home-foreclosure suits because the parties trying to foreclose on houses could not prove they were entitled to grab someone's home.
Thus, anyone who is sued by a company trying to collect on a private student loan should demand that the suing party show that it is the legal entity entitled to sue for the money. Fortunately for Mr. Holmes, NCSLT was unable to show that it was the party that had legal standing to sue him.
II. Student-loan debtors need good lawyers
This brings me to the second reason the Holmes case is significant for other student-loan debtors. Mr. Holmes defeated NCSLT on a technicality. Specifically, NCSLT's documentation did not pass muster with Indiana Evidence Rule 803(6). But only a competent lawyer would know how to make the technical argument that benefited Mr. Holmes.
I once thought that student-loan debtors with the right facts could go into court without lawyers and be successful. And indeed, some debtors have won their cases in federal bankruptcy courts over the ruthless opposition of the debt collectors' lawyers.
But many of these cases turn on legal technicalities that a nonlawyer could not be expected to know. The Holmes case was based on Indiana law, but federal bankruptcy law also has technicalities that nonlawyers will find very difficult to master.
That is why I was heartened by the decision of the Massachusetts Bar Association to organize teams of volunteer lawyers to represent student-loan debtors in bankruptcy courts. If student-loan debtors can get good lawyers, they will have a far better chance of winning their cases than if they go to court without legal counsel.
III. Never co-sign your children's student loans
There's a third lesson to be learned from the Holmes case. Mr. Holmes co-signed a student loan with his son Nicholas to enable Nicholas to enroll at the University of Southern Indiana. In my view, that was a mistake. If Nicholas couldn't figure out a way to attend a regional state university without having his dad co-sign a student loan, then Nicholas needed to figure out another way to go to college.
I've said this before, and I'll say it one more time. Parents should never co-sign their children's student loans. Never. Never. Never.
Note: My thanks to Steve Rhode for calling my attention to Holmes v. NCSLT.
References
Alexander Holmes v. National Collegiate Student Loan Trust (Ind. Ct. App. Feb. 27, 2018).
Steve Rhode. Perfect Example Why Most National College Student Loan Trust Lawsuits are BS. Getoutofdebtguyorg., March 1, 2018.
Thursday, March 1, 2018
Lady Bird, the movie, sends an insidious message about elite East Coast colleges (Spoiler Alert)
Lady Bird, Greta Gerwig's new coming-of-age movie, has been nominated for five Academy Awards, including Best Picture. But it is an insidious movie, which delivers a treacherous message that self-fulfillment can be found at an elite East Coast college.
Christine, who calls herself Lady Bird, is a discontented California girl who attends a Catholic high school in Sacramento. Her mother doesn't understand her, the guy she is sweet on is gay, and she cheats on her exams.
To make matters worse, Lady Bird's parents live in a tiny ranch-style home, with only one bathroom. She self-deprecatingly tells her boyfriend she lives on the wrong side of the tracks, an insult he guilelessly passes on to her mom and dad.
Sacramento bores Lady Bird, which she dismisses as "the Midwest of California." She longs to escape California to go to college on the East Coast. Although several elite schools reject her, she finally get accepted to a fancy college in New York.
But the school is expensive. Her father, who comes across as a genuinely nice guy, recently lost his job; and at his age, he is unlikely to get another one. Lady Bird's mother, a nurse, works double shifts at a hospital to make ends meet.
But Lady Bird simply must go east to college, so her dad refinances the family home to cover the cost. The movie ends with Lady Bird in New York City, where she lies to one of the first guys she meets and tells him she is from San Francisco.
What a piece of crap! Any young woman who allows her out-of-work father to refinance the family's pathetic little house so she can attend a snooty East Coast college is a self-absorbed jerk. Although the movie is pitched as a young woman's heroic quest for self-fulfillment, it's really just a gratuitous insult to flyover country, which the filmmaker expanded to include parts of California.
Christine, who calls herself Lady Bird, is a discontented California girl who attends a Catholic high school in Sacramento. Her mother doesn't understand her, the guy she is sweet on is gay, and she cheats on her exams.
To make matters worse, Lady Bird's parents live in a tiny ranch-style home, with only one bathroom. She self-deprecatingly tells her boyfriend she lives on the wrong side of the tracks, an insult he guilelessly passes on to her mom and dad.
Sacramento bores Lady Bird, which she dismisses as "the Midwest of California." She longs to escape California to go to college on the East Coast. Although several elite schools reject her, she finally get accepted to a fancy college in New York.
But the school is expensive. Her father, who comes across as a genuinely nice guy, recently lost his job; and at his age, he is unlikely to get another one. Lady Bird's mother, a nurse, works double shifts at a hospital to make ends meet.
But Lady Bird simply must go east to college, so her dad refinances the family home to cover the cost. The movie ends with Lady Bird in New York City, where she lies to one of the first guys she meets and tells him she is from San Francisco.
What a piece of crap! Any young woman who allows her out-of-work father to refinance the family's pathetic little house so she can attend a snooty East Coast college is a self-absorbed jerk. Although the movie is pitched as a young woman's heroic quest for self-fulfillment, it's really just a gratuitous insult to flyover country, which the filmmaker expanded to include parts of California.
Friday, February 16, 2018
Congress enacts teeny weeny student-loan reform legislation: Is the glass half full or half empty?
As reported by Steve Rhode, Congress passed a very modest student-loan reform bill late last year. Titled the Stop Taxing Death and Disability Act, the new law eliminates an unfair tax on forgiven student loans.
Prior to passage of this law, the government would forgive student loans held by debtors who became permanently disabled, but the amount of the forgiven debt was considered taxable income by the IRS. You may remember the story of Will Milzarski, a military veteran who was wounded and disabled while fighting in Afghanistan. The Department of Education forgave about a quarter of a million dollars in student loans, but the IRS sent Mr. Milzarski a tax bill for $62,000.
The Stop Taxing Death and Disability Act, which was adopted by Congress with bipartisan support, eliminates this unfair tax provision. Under the new law, all student-loan debt (including private student loans) that is forgiven due to the death or disability of the debtor is exempt from federal income taxes.
In addition, the law gives a tax break to the parents of student-loan debtors. Parents who owe student loans on behalf of their children may obtain a student-loan discharge if their child becomes disabled. And parents who obtain such a discharge won't be taxed on the forgiven debt.
So, is the glass half full or half empty?
On the good side, passage of this modest and noncontroversial bill is a sign that Republicans and Democrats can work together to pass student-loan reform legislation. The bill's three co-sponsors--Senators Rob Portman (R-Ohio), Chris Coons (D-Delaware), and Angus King (I-Maine) are to be commended for getting this little bill adopted.
But on the other hand, as Mr. Rhode pointed out, the bill did not address the enormous tax liability that college borrowers face who are in income-driven repayment plans (IDRs). More than six million student debtors are enrolled in IDRs, and most of them are making monthly loan payments so small that they will never pay off their loans. Why? Because the monthly payments aren't large enough to cover accruing interest on the underlying debt.
People locked into IDRs are obligated to make monthly loan payments for terms that stretch out for 20, 25 and even 30 years. At the end of the repayment term, any remaining unpaid debt is forgiven, but the amount of the forgiven debt is considered taxable income.
In other words, a student debtor who successfully completes a 20-year IDR sheds one unpayable debt to the Department of Education and acquires another unpayable debt to the IRS.
Nevertheless, the fact that Congress passed the Stop Taxing Death and Disability Act is a good sign. Maybe Democrats and Republicans can build on this tiny victory to enact more sweeping student-loan reform.
For example, perhaps a bipartisan coalition could rally behind the Warren-McCaskill bill to stop the IRS from garnishing the Social Security checks of elderly student-loan defaulters. Who in good conscience could vote against that bill?
And is it too much to hope that Congress might someday reform the Bankruptcy Code and allow suffering student-loan borrowers to discharge their crushing student loans in bankruptcy?
References
Associated Press. Wounded Michigan vet gets student loan debt forgiven, but now IRS wants $62,000. Chicago Tribune, October 20, 2017.
Judith Putnam. Student debt forgiven, but wounded vet gets $62,000 tax bill. USA Today, October 20, 2017.
Representative John Delaney press release. Delaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt, May 5, 2017.
Representative John Katko press release. Reps. Katko and Delaney File Legislation to Help Americans Struggling with Student Loan Debt. May 8, 2017.
Steve Rhode. 15 Seconds of Positive News About Student Loans and Congress. Get Out of Debt Guy, February 15, 2108.
Some physical or mental impairments can qualify you for a total r permanent disability discharge on your federal student loans and/or TEACH grant service obligation. U.S. Department of Education web site (undated).
Prior to passage of this law, the government would forgive student loans held by debtors who became permanently disabled, but the amount of the forgiven debt was considered taxable income by the IRS. You may remember the story of Will Milzarski, a military veteran who was wounded and disabled while fighting in Afghanistan. The Department of Education forgave about a quarter of a million dollars in student loans, but the IRS sent Mr. Milzarski a tax bill for $62,000.
The Stop Taxing Death and Disability Act, which was adopted by Congress with bipartisan support, eliminates this unfair tax provision. Under the new law, all student-loan debt (including private student loans) that is forgiven due to the death or disability of the debtor is exempt from federal income taxes.
In addition, the law gives a tax break to the parents of student-loan debtors. Parents who owe student loans on behalf of their children may obtain a student-loan discharge if their child becomes disabled. And parents who obtain such a discharge won't be taxed on the forgiven debt.
So, is the glass half full or half empty?
On the good side, passage of this modest and noncontroversial bill is a sign that Republicans and Democrats can work together to pass student-loan reform legislation. The bill's three co-sponsors--Senators Rob Portman (R-Ohio), Chris Coons (D-Delaware), and Angus King (I-Maine) are to be commended for getting this little bill adopted.
But on the other hand, as Mr. Rhode pointed out, the bill did not address the enormous tax liability that college borrowers face who are in income-driven repayment plans (IDRs). More than six million student debtors are enrolled in IDRs, and most of them are making monthly loan payments so small that they will never pay off their loans. Why? Because the monthly payments aren't large enough to cover accruing interest on the underlying debt.
People locked into IDRs are obligated to make monthly loan payments for terms that stretch out for 20, 25 and even 30 years. At the end of the repayment term, any remaining unpaid debt is forgiven, but the amount of the forgiven debt is considered taxable income.
In other words, a student debtor who successfully completes a 20-year IDR sheds one unpayable debt to the Department of Education and acquires another unpayable debt to the IRS.
Nevertheless, the fact that Congress passed the Stop Taxing Death and Disability Act is a good sign. Maybe Democrats and Republicans can build on this tiny victory to enact more sweeping student-loan reform.
For example, perhaps a bipartisan coalition could rally behind the Warren-McCaskill bill to stop the IRS from garnishing the Social Security checks of elderly student-loan defaulters. Who in good conscience could vote against that bill?
And is it too much to hope that Congress might someday reform the Bankruptcy Code and allow suffering student-loan borrowers to discharge their crushing student loans in bankruptcy?
 |
| Will Milzarski, Wounded Veteran (photo credit: Chicago Tribune) |
References
Associated Press. Wounded Michigan vet gets student loan debt forgiven, but now IRS wants $62,000. Chicago Tribune, October 20, 2017.
Judith Putnam. Student debt forgiven, but wounded vet gets $62,000 tax bill. USA Today, October 20, 2017.
Representative John Delaney press release. Delaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt, May 5, 2017.
Representative John Katko press release. Reps. Katko and Delaney File Legislation to Help Americans Struggling with Student Loan Debt. May 8, 2017.
Steve Rhode. 15 Seconds of Positive News About Student Loans and Congress. Get Out of Debt Guy, February 15, 2108.
Some physical or mental impairments can qualify you for a total r permanent disability discharge on your federal student loans and/or TEACH grant service obligation. U.S. Department of Education web site (undated).
Tuesday, February 13, 2018
For the sake of the economy, let's forgive all student-loan debt
Forty-four million people are burdened by student loans--totally about $1.5 trillion in outstanding debt. What would happen if the federal government just forgave all those loans?
Researchers at the Levy Economics Institute of Bard College asked that question, and their answer might surprise you. Forgiving all this debt, they say, would boost the Gross National Product by $86 billion to $108 billion a year over a ten-year period. Released from their student loans, millions of people would see an immediate increase in their disposable income, permitting them to buy homes, save for retirement, purchase consumer goods, and start families.
Moreover, as Eric Levitz pointed out, Congress passed a $1.5 trillion tax cut last year, with most of the benefits going to the wealthy. Wouldn't it have made more sense to have forgiven $1.5 trillion in college loans instead? Most of the benefits would have gone to low-income and middle income Americans--not the rich.
Of course, our government can't simply forgive $1.5 trillion in student loans and continue the federal student loan program. The thing to do, then, is to replace the student-loan program with free undergraduate education at a public college or university.
But wouldn't that be prohibitively expensive? No it wouldn't. As Ryan Cooper argues, the total cost of tuition at public institutions was only $58 billion in 2014. Our government invests twice that amount each year in the federal student loan program. It would actually be less expensive to American taxpayers if we simply shut down the student loan program and gave everyone a free college education at a public college.
Theoretically, it is true, the federal government is only loaning students money to attend college; it expects to get that money back at interest as students pay off their student loans. But in fact, about half of the nation's outstanding student-loan balance will never be paid back. It's just going down a rat hole for educational experiences that are overpriced and that often don't lead to well-paying jobs.
Of course, forgiving everyone's student loans and providing a free college education would have some major collateral consequences. If Americans could get a free college education at a public institution, they would stop enrolling in private colleges and for-profit schools. If the federal government actually implemented this plan, small liberal arts institutions all over the United States would close their doors and the for-profit college industry would collapse.
But the private liberal arts colleges will be closing anyway. Harvard professor Clay Christensen predicts that half of them will close within the next 10 to 15 years as Americans figure out that it makes no sense at all to spend $200,000 to get a liberal arts degree from a nondescript college in the upper Midwest. As for the for-profit schools, they are a cancer and should be closed down anyway.
But, critics might ask, what about the moral hazard of forgiving all that debt? Is it fair to allow people to borrow $100,000 or more to get an MBA and then not pay it back?
First of all, the student borrowers who are suffering the most have been people who borrowed a relatively small amount of money. People who have borrowed the least are most likely to default. It is true that some people whose student loans are forgiven would receive a windfall, but the vast majority of people who would benefit from wholesale student-loan forgiveness would be people who paid too much money for postsecondary education and did not get fair value.
Furthermore, whatever moral taint can be found in student-loan forgiveness is as nothing compared to fraud committed by the for-profit college industry, the exploitation by the student-loan debt collectors, and the venality of university presidents making million-dollar salaries while students are forced to borrow more and more money to pay escalating tuition rates.
And if massive student-loan forgiveness still sticks in the nation's craw, then let's just reform the bankruptcy laws and allow deserving debtors to obtain relief from their student loans in the bankruptcy courts. If the "undue hardship" provision were removed from the Bankruptcy Code, literally millions of Americans would file bankruptcy and get relief.
But the Bard College researchers have gotten to the heart of the matter. We should forgive all student loans and simply allow people to study for free to get an undergraduate education at a public university.
References
Ryan Cooper. The case for erasing every last penny of student debt. The Week, February 8, 2018.
Doug Lederman. Clay Christensen, Doubling Down. Inside Higher Ed, April 28, 2017.
Eric Levitz. We Must Cancel Everyone's Student Debt, for the Economy's Sake. New York, February 9, 2018.
Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum. The Macroeconomic Effects of Student Debt Cancellation. Levy Economics Institute of Bard College, February 2018.
Researchers at the Levy Economics Institute of Bard College asked that question, and their answer might surprise you. Forgiving all this debt, they say, would boost the Gross National Product by $86 billion to $108 billion a year over a ten-year period. Released from their student loans, millions of people would see an immediate increase in their disposable income, permitting them to buy homes, save for retirement, purchase consumer goods, and start families.
Moreover, as Eric Levitz pointed out, Congress passed a $1.5 trillion tax cut last year, with most of the benefits going to the wealthy. Wouldn't it have made more sense to have forgiven $1.5 trillion in college loans instead? Most of the benefits would have gone to low-income and middle income Americans--not the rich.
Of course, our government can't simply forgive $1.5 trillion in student loans and continue the federal student loan program. The thing to do, then, is to replace the student-loan program with free undergraduate education at a public college or university.
But wouldn't that be prohibitively expensive? No it wouldn't. As Ryan Cooper argues, the total cost of tuition at public institutions was only $58 billion in 2014. Our government invests twice that amount each year in the federal student loan program. It would actually be less expensive to American taxpayers if we simply shut down the student loan program and gave everyone a free college education at a public college.
Theoretically, it is true, the federal government is only loaning students money to attend college; it expects to get that money back at interest as students pay off their student loans. But in fact, about half of the nation's outstanding student-loan balance will never be paid back. It's just going down a rat hole for educational experiences that are overpriced and that often don't lead to well-paying jobs.
Of course, forgiving everyone's student loans and providing a free college education would have some major collateral consequences. If Americans could get a free college education at a public institution, they would stop enrolling in private colleges and for-profit schools. If the federal government actually implemented this plan, small liberal arts institutions all over the United States would close their doors and the for-profit college industry would collapse.
But the private liberal arts colleges will be closing anyway. Harvard professor Clay Christensen predicts that half of them will close within the next 10 to 15 years as Americans figure out that it makes no sense at all to spend $200,000 to get a liberal arts degree from a nondescript college in the upper Midwest. As for the for-profit schools, they are a cancer and should be closed down anyway.
But, critics might ask, what about the moral hazard of forgiving all that debt? Is it fair to allow people to borrow $100,000 or more to get an MBA and then not pay it back?
First of all, the student borrowers who are suffering the most have been people who borrowed a relatively small amount of money. People who have borrowed the least are most likely to default. It is true that some people whose student loans are forgiven would receive a windfall, but the vast majority of people who would benefit from wholesale student-loan forgiveness would be people who paid too much money for postsecondary education and did not get fair value.
Furthermore, whatever moral taint can be found in student-loan forgiveness is as nothing compared to fraud committed by the for-profit college industry, the exploitation by the student-loan debt collectors, and the venality of university presidents making million-dollar salaries while students are forced to borrow more and more money to pay escalating tuition rates.
And if massive student-loan forgiveness still sticks in the nation's craw, then let's just reform the bankruptcy laws and allow deserving debtors to obtain relief from their student loans in the bankruptcy courts. If the "undue hardship" provision were removed from the Bankruptcy Code, literally millions of Americans would file bankruptcy and get relief.
But the Bard College researchers have gotten to the heart of the matter. We should forgive all student loans and simply allow people to study for free to get an undergraduate education at a public university.
References
Ryan Cooper. The case for erasing every last penny of student debt. The Week, February 8, 2018.
Doug Lederman. Clay Christensen, Doubling Down. Inside Higher Ed, April 28, 2017.
Eric Levitz. We Must Cancel Everyone's Student Debt, for the Economy's Sake. New York, February 9, 2018.
Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum. The Macroeconomic Effects of Student Debt Cancellation. Levy Economics Institute of Bard College, February 2018.
Tuesday, February 6, 2018
Loan-Forgiveness and Income-Driven Repayment Plans Are Costing Taxpayers a Bundle of Money
The Department of Education's Office of Inspector General (OIG)issued another one of those mealy-mouth reports we've come to expect from the Department. In essence, the OIG told us something we already knew: DOE's income-driven repayment plans (IDRs) and debt forgiveness plans are costing taxpayers billions of dollars.
For several years now, the higher education community has touted income-driven repayment plans as the panacea for the rising cost of going to college. Back during the 2016 presidential campaign, Catharine Hill, president of Vassar College, wrote an op ed essay for the New York Times attacking Senator Bernie Sander's proposal to allow people to go to college for free. Free college is not the answer, Hill argued. Rather we need to expand income-driven repayment programs.
Indeed, DOE has expanded income-driven repayment options. President Obama's administration rolled out the PAYE and REPAYE, programs that allow student borrowers to pay 10 percent of their adjusted income for 20 years in lieu of the standard 10-year repayment plan. Borrowers who make regular payments for 20 years will have their loan balances forgiven.
As outlined by OIG, the Department of Education offers six income-driven repayment plans and two loan forgiveness plans. Of course, all the student loans under these plans accrue interest. Even an idiot knows that borrowers who makes loan payments that aren't large enough to pay accruing interest will never pay off their loans.
So it shouldn't surprise anyone that DOE's flexible spending plans and loan forgiveness plans are costing the taxpayers billions of dollars because the government is loaning people more money than they will ever repay.
As the OIG reported, DOE's loan balance for income-driven repayment plans increased from $7.1 billion to $51.5 billion between 2011 and 2015. That's an increase of 625 percent in just four years.
Meanwhile, government subsidies for income-driven repayment plans ballooned from $1.4 billion to $11.5 billion over the same four years--an increase of more than 800 percent.
Why did our government create these insane flexible repayment plans? I can think of one primary reason.
IDRs allow DOE to maintain the fiction that the vast majority of college borrowers are paying back their loans. For most of the people in these plans, an IDR is the only alternative to default. In fact, DOE has encouraged college-loan defaulters and people in danger of default to sign up for IDRs.
But most people in income-driven repayment plans are not paying off their loans because their payments aren't large enough to cover accrued interest. Thus, while IDR participants are not officially in default, they are only making token payments on loans they will never pay off.
What is the OIG's advice to DOE about how to handle the enormous cost of its income-driven repayment plans and its loan forgiveness programs? Here is OIG's gobbledygook recommendation:
As the Wall Street Journal reported about 20 months ago, 43 percent of college borrowers--approximately 9.6 million people--weren't making loan payments as of January 1, 2016. Some of these borrowers were in default, some had delinquent loans and some had loans in forbearance or deferment.
And thanks to DOE's income-driven repayment plans, an additional six million people are making payments too small to pay off their loans.
It is time for DOE to be more than transparent. It needs to admit that about half the people who took out student loans will never pay them back. Thus, of the $1.4 trillion in outstanding student loans, more than half of it will never be collected.
References
Paul Fain. Costs Mount for Federal Loan Programs. Inside Higher Ed, February 5, 2018.
Catharine Hill. Free Tuition Is Not the Answer. New York Times, November 30, 2015, p. A23.
Josh Mitchell. More Than 40% of Student Borrowers Aren't Making Payments. Wall Street Journal, April 7, 2016.
U.S. Department of Education Office of Inspector General (2018, January 31). The Department's Communication Regarding the Costs of Income-Driven Repayment Plans and Loan Forgiveness Programs. ED-OIG/A09Q0003. Washington DC: Author
U.S. Government Accountability Office (2016 December). Federal Student Loans: Education Needs to Improve Its Income Driven Repayment Plan Budget Estimates. Washington DC: Author.
For several years now, the higher education community has touted income-driven repayment plans as the panacea for the rising cost of going to college. Back during the 2016 presidential campaign, Catharine Hill, president of Vassar College, wrote an op ed essay for the New York Times attacking Senator Bernie Sander's proposal to allow people to go to college for free. Free college is not the answer, Hill argued. Rather we need to expand income-driven repayment programs.
Indeed, DOE has expanded income-driven repayment options. President Obama's administration rolled out the PAYE and REPAYE, programs that allow student borrowers to pay 10 percent of their adjusted income for 20 years in lieu of the standard 10-year repayment plan. Borrowers who make regular payments for 20 years will have their loan balances forgiven.
As outlined by OIG, the Department of Education offers six income-driven repayment plans and two loan forgiveness plans. Of course, all the student loans under these plans accrue interest. Even an idiot knows that borrowers who makes loan payments that aren't large enough to pay accruing interest will never pay off their loans.
So it shouldn't surprise anyone that DOE's flexible spending plans and loan forgiveness plans are costing the taxpayers billions of dollars because the government is loaning people more money than they will ever repay.
As the OIG reported, DOE's loan balance for income-driven repayment plans increased from $7.1 billion to $51.5 billion between 2011 and 2015. That's an increase of 625 percent in just four years.
Meanwhile, government subsidies for income-driven repayment plans ballooned from $1.4 billion to $11.5 billion over the same four years--an increase of more than 800 percent.
Why did our government create these insane flexible repayment plans? I can think of one primary reason.
IDRs allow DOE to maintain the fiction that the vast majority of college borrowers are paying back their loans. For most of the people in these plans, an IDR is the only alternative to default. In fact, DOE has encouraged college-loan defaulters and people in danger of default to sign up for IDRs.
But most people in income-driven repayment plans are not paying off their loans because their payments aren't large enough to cover accrued interest. Thus, while IDR participants are not officially in default, they are only making token payments on loans they will never pay off.
What is the OIG's advice to DOE about how to handle the enormous cost of its income-driven repayment plans and its loan forgiveness programs? Here is OIG's gobbledygook recommendation:
We recommend that the Department enhance its communications regarding cost information related to the Federal student loan program's IDR plans and loan forgiveness plans to make it more informative to decision makers and the public.That's right: All OIG can think of to recommend is more transparency!
As the Wall Street Journal reported about 20 months ago, 43 percent of college borrowers--approximately 9.6 million people--weren't making loan payments as of January 1, 2016. Some of these borrowers were in default, some had delinquent loans and some had loans in forbearance or deferment.
And thanks to DOE's income-driven repayment plans, an additional six million people are making payments too small to pay off their loans.
It is time for DOE to be more than transparent. It needs to admit that about half the people who took out student loans will never pay them back. Thus, of the $1.4 trillion in outstanding student loans, more than half of it will never be collected.
References
Paul Fain. Costs Mount for Federal Loan Programs. Inside Higher Ed, February 5, 2018.
Catharine Hill. Free Tuition Is Not the Answer. New York Times, November 30, 2015, p. A23.
Josh Mitchell. More Than 40% of Student Borrowers Aren't Making Payments. Wall Street Journal, April 7, 2016.
U.S. Department of Education Office of Inspector General (2018, January 31). The Department's Communication Regarding the Costs of Income-Driven Repayment Plans and Loan Forgiveness Programs. ED-OIG/A09Q0003. Washington DC: Author
U.S. Government Accountability Office (2016 December). Federal Student Loans: Education Needs to Improve Its Income Driven Repayment Plan Budget Estimates. Washington DC: Author.
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