American Enterprise Institute: A ton of graduate students who attended HBCUs are not paying down their student loans

Jason Delisle, writing for the American Enterprise Institute, reported that a great many Americans who took out loans to attend graduate school are not paying them back.  Most are not defaulting; they simply are putting their loans in a holding pattern that doesn't require them to pay down their loan balances.

What's going on? As Delisle explained, student borrowers have three options for managing their graduate-school loans to keep those loans from going in to default.

Income-Based Repay Plans. First, graduate-student borrowers can enter income-based repayment plans (IBRPs), which set monthly loan payments based on income, not the amount borrowed. IBRPs allow borrowers to lower their monthly loan payments, but often (perhaps almost always), the payments aren't large enough to cover accruing interest. When this happens, loan balances grow even when borrowers are making regularly monthly payments.

Forbearance. A student-loan debtor can ask for multiple types of forbearance on their loans. As Delisle explained, "the most common forbearance effectively has no eligibility criteria."  Borrowers simply request a forbearance. Usually, interest continues to accrue during the forbearance period, which can last for no more than 36 consecutive months.

Deferment. Student borrowers can also apply for an economic hardship deferment that allows them to skip making loan payments due to economic hardship such as unemployment or severely reduced income. Borrowers automatically get a deferment while they continue to be enrolled in school. Again, interest accrues on their student loans while they are in deferment.

Graduate students typically accumulate the most student-loan debt because graduate education is expensive and there is no monetary cap on the amount of student loans that can be taken out to fund graduate education. Nevertheless, graduate students typical have low default rates. According to Delisle, only 4 percent of the 2009 cohort of graduate students were in default five years into repayment.

But a low default rate does not mean graduate-student borrowers are paying down their loans. In fact, a high percentage of graduate-student debtors are seeing their loans negatively amortize five years into repayment--meaning their loan balances are going up even though their loans are in good standing.

Why? Because thousands of graduate-student borrowers are not financially able to pay down their loans under a standard 10-year repayment plan. In order to avoid default, these borrowers select one of the three options listed above: IBRPs, loan forbearance, or deferment.

Here's where Delisle's report becomes especially interesting. Delisle lists the 20 graduate and professional schools with the highest share of graduate-student borrowers who had not reduced the principal on their loans five years into repayment.Twelve of these 20 schools are historically black colleges or universities (HBCUs); and their nonpayment rates ranged from 44 to 65 percent.

Here's the list of the 12 HBCUs with high nonpayment rates for their graduate students, along with the percentage of borrowers who had not reduced their loan principal. Of these 12 institutions, 11 are public universities.

1. Mississippi Valley State University       65%
2. Southern University New Orleans         62%
3. Grambling State University                   59%
4. Virginia State University                       53%
5. Prairie View A & M University             51%
6. Delaware State University                     51%
7. Alabama A & M University                  50%
8. Alabama State University                      49%
9. Southern University at Baton Rouge     48%
10. Clark Atlanta University                        47%
11. Jackson State University                        46%
12. Lincoln University of Pennsylvania       44%

The AEI report is additional data showing that African Americans are particularly affected by the federal student loan program. At 12 HBCUs, from 44 to 65 percent of their graduate students entering repayment had not reduced the principal on their student loans by one dime five years later.

Perhaps the AEI report will prompt legislators to examine more closely whether HBCUs funded with public monies are providing their students with useful graduate education. Something is wrong when a high percentage of graduate students who attended a HBCU are not able to pay down their student-loan debt five years after ending their studies.

References

Jason Delisle. Graduate Schools with the Lowest Rates of Student Loan Repayment. American Enterprise Institute, June 2018.

Barbara Erkson v. U.S. Department of Education: A 64-year-old woman, struggling to make ends meet, discharges $107,000 in student loans in bankruptcy

Barbara Erkson, an unmarried 64-year-old woman, filed an adversary proceeding in a Maine bankruptcy court  in an attempt to discharge $107,000 in student loans in bankruptcy. The U.S. Department of Education and Educational Credit Management Corporation (ECMC) vigorously objected, but Judge Peter Carey rejected their heartless arguments and granted Ms. Erkson a full discharge.

This is Ms. Erkson's story as told by Judge Carey. In 1998, when she was in her forties, Erkson enrolled at Vermont College of Norwich University to pursue a Bachelor of Arts in Interdisciplinary Studies. She took out student loans to finance her studies and graduated in 2002 with considerable debt.

After graduating, Erkson worked at various community agencies in order to obtain the conditional licenses necessary to work as a licensed counselor. From 2002 through 2008, she worked at a private counseling service, but her job was terminated due to funding constraints. At some point she defaulted on her undergraduate loans.

Erkson then entered graduate school at Salve Regina University, and she obtained a master of arts degree in Holistic Counseling in 2011. Thereafter she held a series of counseling jobs and maintained a private practice, but she did not make enough money to sustain herself and pay back her student loans.

The U.S. Department of Education and ECMC objected furiously to releasing Erkson from her student debt. She had not shown good faith, they said, because she had not agreed to enter a long-term income-based repayment plan.  They also objected to some of Erkson's expenses. She should not have hired a dog walker, they contended. Nor should she be leasing an automobile. They even criticized her for going to graduate school since her master's degree did not improve her income level.

Fortunately for Barbara Erkson, Judge Carey is a compassionate man; and he waved aside all her creditors' cold-hearted objections.

Plaintiff impresses the Court as a hard-working woman who chose an area of study which, due to changes in federal laws and regulations, proved less profitable than she anticipated. If the Court applied such stringent standards to all student loan challenges, anyone who failed to correctly read the tea leaves of the future and incurred student debt in an area that technology, societal preferences, or legislation later made obsolete would be ineligible for a discharge. The [Bankruptcy] Code simply does not go so far. 

Judge Carey rejected the creditors' argument that Erkson handled her loans in bad faith. They pointed out that her loans were almost always in deferment, forbearance or in default and thus she had made relatively few loan payments. Nevertheless, Judge Carey wrote, "neither DOE nor ECMC challenged [Erkson's] testimony that she struggled to find full time work until 2002 or that, from 2002 until 2008, she did not generate sufficient income to maintain a minimal standard of living and repay her student loans." In Judge Carey's opinion, Erkson's failure to make any meaningful loan payments was "the result of her meager income and not evidence of bad faith."

Interestingly, Erkson argued that she suffered from a hearing impairment that hindered her efforts to find and keep a good job. Judge Carey accepted Erkson's testimony on that point, but he made clear his decision did not turn on Erkson's health situation. Her current financial condition and future economic prospects entitled Erkson to a bankruptcy discharge of her student loans, the judge ruled, without considering her hearing impairment.

What are we to make of the Erkson decision?

First, DOE and ECMC are bullies. Both agencies almost always oppose undue-hardship discharges for distressed student-loan debtors, regardless of individual circumstances.  They always argue that debtors handled their student loans in bad faith and that they should be denied a discharge if they fail to sign up for a 25-year repayment plan. They always quibble about a debtor's routine expenses and pore over a debtor's every expenditure in humiliating detail.

Second, the Erkson decision is a good one for millions of people who took out student loans to pursue careers that did not work out like they planned. How many people have enrolled in chicken-shit for-profit colleges, third-tier law schools, or overpriced professional programs only to learn their educational investments would never pay off?

In the eyes of the U.S. Department of Education and ECMC, DOE's corporate hit man, such people are losers; and their inability to pay back their student loans is prima facie evidence of bad faith.

But Judge Carey disagreed. People who make a sincere effort to find a good job and wind up unable to pay back their student loans while maintaining a minimal standard of living are entitled to bankruptcy relief: period. It's time DOE and ECMC get that message.

The Department of Education and ECMC are bullies.

References

Erkson v. U.S. Department of Education, 582 B.R. 542 (Bankr. D. Me. 2018).

Are bankruptcy judges becoming more sympathetic toward student-loan debtors? Maybe but maybe not

Katy Stech Ferek published an article in Wall Street Journal a few days ago in which she reported that bankruptcy judges are becoming more sympathetic to debtors seeking to discharge their student loans in bankruptcy. Is Ferek correct?

I once would have thought so. Until recently, I believed the bankruptcy courts were becoming more compassionate toward bankrupt student debtors. But now I am not so sure.

Without question there have been some heartening developments in the federal bankruptcy courts over the past few years. At the appellate level, the Ninth Circuit Bankruptcy Appellate Panel discharged student loans owed by Janet Roth, an elderly student-loan debtor who was living on a monthly Social Security check of less than $800. Judge Jim Pappas, in a concurring opinion, argued sensibly that the courts should abandon the harsh Brunner test for determining when a debtor can discharge student loans under the Bankruptcy Code's "undue hardship" standard.

The Seventh Circuit, in its Krieger decision, discharged student debt of a woman in her fifties on undue hardship grounds, in spite of the fact that she had not enrolled in an income-based repayment plan. The court agreed with the bankruptcy court that Krieger's situation was hopeless. This too was a heartening decision for distressed student debtors.

Fern v. Fedloan Servicing, decided in 2017 is another good decision. In that case, the Eighth Circuit Bankruptcy Appellate Panel affirmed bankruptcy relief for a single mother, specifically noting the psychological stress experienced by debtors who know they will never pay off their student loans.

And there have been several good decisions in the lower courts. The Abney case out of Missouri, the Lamento case out of Ohio, the Myhre decision, and a handful of other recent decisions were compassionate rulings in favor of down-on-their-luck student debtors.

But a few warm days do not a summer make. Thus far, no federal appellate court has explicitly overruled the draconian Brunner test for determining when a student loan constitutes an undue hardship.

And there have been some shockingly harsh rulings against student debtors. In Butler v. Educational Credit Management Corporation, decided in 2016, a bankruptcy judge refused to discharge Brenda Butler's student debt, which had doubled in the twenty years since she had graduated from college, in spite of the fact she was unemployed and the judge had explicitly stated that she had handled her student loans in good faith. The judge ruled Butler should stay in a 25-year repayment plan that would end in 2037, more than forty years after she graduated from college!

Moreover, there simply have not been enough recently published bankruptcy-court rulings to constitute a trend. As Ferek reported in her article, federal judges in student-loan bankruptcy cases ruled only 16 times in 2017, and student loans were canceled in only three of those cases.

Even favorable rulings do not look quite so encouraging when examined closely.  Ferek mentioned the Murray case out of Kansas, in which a bankruptcy judge granted a partial discharge of a married couple's student-loan debts. This was a favorable ruling, but Educational Credit Management Corporation, the federal government's most ruthless debt collector, appealed. Fortunately for the Murrays, they were represented by an able Kansas lawyer; and the National Association of Consumer Bankruptcy Attorneys, joined by the National Consumer Law Center, filed an amicus brief on the Murrays' behalf. The Murrays prevailed on appeal, but most student-loan debtors do not have the legal resources the Murrays had.

Ferek wrote a useful article, and I hope distressed student-loan debtors read it and are encouraged. Nevertheless, the fact remains that very few insolvent college-loan borrowers get bankruptcy relief from their crushing student loans.  And those who have the courage to seek bankruptcy relief often have a long road to travel. Michael Hedlund, a law school graduate who won partial relief from his student debt in a Ninth Circuit ruling, litigated with his creditor for 10 years!


References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Butler v. Educational Credit Management Corporation, Case No. 14-71585, Chapter 7, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).

Katy Stech Ferek. Judges Wouldn't consider Forgiving Crippling Student Loans--Until Now. Wall Street Journal, June 14, 2018.

Fern v. Fedloan Servicing, 563 B.R. 1; 2017 (8th Cir. B.A.P. 2017). 

Hedlund v   Educational Resources Institute, Inc., 718 F.3d 848 (9th Cir. 2013).

Krieger v. Educational Credit Management Corporation, 713 F.3d 882 (7th Cir. 2013).

Lamento v. U.S. Department of Education, 520 B.R. 667 (Bankr. N.D. Ohio 2014).

Murray v. Educational Credit Management Corporation, 563 B.R. 52 (Bankr. D. Kan. 2016), aff'd, Case No. 16-2838 (D. Kan. Sept. 22, 2017).

Myhre v. U.S. Department of Education, 503 B.R. 698; 2013 (Bankr. W.D. Wis. 2013). 

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. B.A.P. 2013). 

The New York Times lambasts Republicans and Betsy DeVos for catering to for-profit colleges: The Gray Lady overlooks culpable Democrats

In an editorial last month, The New York Times lambasted Secretary of Education Betsy DeVos, the Trump administration and congressional Republicans for protecting the greasy for-profit college industry. "Try as they might," the Times observed, "the Trump administration and Republicans in Congress cannot disguise that they continue to do the bidding of the for-profit industry, which has saddled working-class students--including veterans--with crushing debt while providing useless degrees, or no degrees at all."

Indeed, the Times grumbled, the Department of Education, under DeVos, "has undermined investigations of the [for-profit college] industry by marginalizing or reassigning lawyers and investigators . . ." Major investigations, the Times reported, have been abandoned, including investigations into the activities of DeVry Education Group, Bridgepoint Education and Career Education Corporation.

The Times is right of course. Betsy DeVos is the shameless lapdog of the for-profit college crowd, which continues to prey on unsophisticated Americans seeking to get a worthwhile education.  The Times predicts that DeVos' behavior may come back to bite the Republicans in the upcoming midterm elections, and perhaps there will be repercussions at the ballot box.

But to be fair, servile obsequiousness to the for-profit colleges is bipartisan. Both Democrats and Republicans have taken campaign contributions from these bandits and both parties have succumbed to the blandishments of the for-profit lobbyists.

In fact, The Nation reported nearly five years ago that two Democratic congressmen were leading an effort to protect for-profit colleges from meaningful regulation.  According to The Nation's reporter Lee Fang, Representative Rob Andrews from New Jersey and Florida congressman Alcee Hastings had taken thousands of dollars from for-profit college executives and for-profit backed political committees.

Andrews is no longer in Congress, but Alcee Hastings is still in office. This is the same Hastings, by the way, who, while sitting as a federal district judge, was charged with bribery, perjury and falsifying documents.  The U.S. Senate impeached him and removed him from his judicial post in 1989.

If the Democrats want to distinguish themselves from their Republican colleagues, they need to speak out forthrightly about the for-profit-college scandal. In my view, the for-profit racketeers cannot be tamed through tougher regulations. The only way to stop these predators from stalking unsuspecting and naive young Americans is to shut the industry down. But the Democrats don't have the courage to speak out against the for-profit mobsters. They seem to hope Americans will overlook their silence about the the for-profit college industry and pin all the blame on the Republicans.

Rep. Alcee Hastings (D-Florida): Friend of the for-profit college industry

References

Editorial. Predatory Colleges, Freed to Fleece Students. New York Times, May 22, 2018.

Lee Fang. Two House Democrats Lead Effort to Protect For-Profit Colleges, Betraying Students and Vets. The Nation, December 13, 2013.

United States Senate.  The Impeachment Trial of Alcee L. Hastings (1989) U.S. District Judge, Florida.

Arizona Summit Law School sues the American Bar Association, claiming ABA accreditors treated it unfairly: Showdown in "Death Valley"

Earlier this month, Arizona Summit Law School sued the American Bar Association after the ABA's accreditors put the school on probation. Don Lively, Arizona Summit's president, claims the ABA's accrediting standards are "vague, indeterminate, and subject to manipulation"; and Penny Wilrich, the law school's interim dean, accused the ABA of creating a "false narrative" about the school.

False narrative? Without a doubt, Arizona Summit is a lousy law school. Last February, only one out of five Arizona Summit graduates passed the Arizona bar exam (25 out of 126 test takers).  Among repeat exam takers, only one out of seven passed it (11 out of 81).

And Arizona Summit is an expensive school to attend. According to Law School Transparency, the total non-discounted cost of getting a JD degree from this crummy law school is $248,000. Wow! A quarter of a million dollars buys a graduate a one-in-five shot of passing the Arizona bar exam.

No wonder one student thinks the school is misnamed. "It's not a summit," the student observed. "It's Death Valley."

Arizona Summit is one of three law schools owned by a for-profit company named Infilaw, and all three schools have sued the ABA claiming they were treated unfairly. I gather the law schools' main argument is that other law schools are even crappier and the ABA isn't sanctioning them.

Unfortunately, the Infilaw schools may be right. Law School Transparency's reports on law-school quality consistently show a number of schools with very low admission standards and poor pass rates on bar exams--including some historically black law schools.  ABA may find it hard to explain why it is sanctioning the for-profit law schools and not the HBCU law schools.

Without a doubt, legal education is in shambles. Inferior law schools are charging students obscene tuition rates and graduating too many students who cannot pass their bar exams.

But the solution is not for the ABA to ease up on regulating dodgy schools, which is what the Infilaw schools apparently want it to do. On the contrary, the ABA needs to crack down harder. In my estimation, at least 20 law schools should be closed.

References

Arizona Supreme Court. February 2018 Examination Results.

Anne Ryman. Arizona Summit Law School sues American Bar Association, claims abuse of power. The Republic, May 24, 2018.

Staci Zaretsky. Law School Completely Wrecks State's Bar Exam Pass Rate, As Usual. Above the Law, May 15, 2018.

Mike Meru racked up $1 million in student loans to go to dental school. Will he ever pay it back?

Perhaps you read Josh Mitchell's story in the Wall Street Journal about Mike Meru, who took out $600,000 in student loans to go to dental school at University of Southern California. Due to fees and accrued interest, Meru now owes $1 million.

How did that work out for Dr. Meru? Not too bad actually. He's now working as a dentist making $225,000 a year. He entered an income-based repayment plan (IBR), which set his monthly payments at only $1,590 a month. If he makes regular payments for 25 years, the unpaid balance on his loans will be forgiven.

But as WSJ's  Josh Mitchell pointed out, Dr. Meru's payments don't cover accruing interest, which means his student-loan debt continues to grow at the rate of almost $4,000 a month. By the time, Dr. Meru completes his 25-year payment obligations, he will owe $2 million. Although this huge sum will be forgiven, the IRS considers forgiven debt as taxable income. Dr. Meru can expect a tax bill for about $700,000.

The student-loan program's many apologists will say Dr. Meru's case is an anomaly because most people borrow far less to get their postsecondary education. In fact, only about 100 people owe $1 million dollars or more. But 2.5 million college borrowers owe at least $100,000; and even people who borrow far less are in deep trouble if they drop out of school before graduating or don't land a good job that allows them to service their loans.

Here are the lessons I draw from Dr. Meru's case:

First, income-based repayment programs are insane because student debtors make payments based on their income, not the amount they owe. Dr. Meru's payments are set at $1,590 a month regardless of whether he borrowed $100,000, $200,000 or $600,000.  Thus, IBRs operate as a perverse incentive for students to borrow as much as they can, because borrowing more money doesn't raise the amount of their monthly payments.

Second, IBRs allow professional schools to raise tuition year after year without restraint because students simply borrow more money to cover the increased cost. USC told Mr. Meru that dental school would cost him about $400,000, but USC increased its tuition at least twice while Meru was in school; and Meru wound up borrowing $600,000 to finish his degree--far more than he had planned for.

Does USC feel bad about putting its graduates into so much debt? Apparently not. Avishai Sadan, USC's dental school dean, said this: "These are choices. We're not coercing. . . You know exactly what you're getting into." By the way, Dr. Sadan got his dentistry degree in Israel: and I'll bet it cost him a lot less than $600,000.

And here's the third lesson I draw from Dr. Meru's story. The student loan program is destroying the integrity of professional education.  As I've explained in recent essays, the federal student loan program has allowed second- and third-tier law schools to jack up tuition rates, causing graduates to leave school with enormous debt and little prospect of landing good jobs.

A medical-school education now costs so much that graduates are forced to choose the most lucrative sectors of the medical field in order to pay off their student loans. That is why more and more general practitioners are foreign born and received their medical training overseas, where people don't have to borrow a bunch of money to get an education.

Dr. Avishai Sadan, Dean of USC's School of Dentistry
"You know exactly what you're getting into."

References

Josh Mitchell. Mike Meru Has $1 Million in Student Loans. How did That Happen? Wall Street Journal, May 25, 2018.

The Public Service Loan Forgiveness Program is a train wreck, and $350 million won't fix it.

The Public Service Loan Forgiveness program (PSLF), created by Congress in 2007, allows people in public service jobs to make income-based student-loan payments for ten years. If they make 120 payments, their loan balances will be forgiven and the amount of the forgiven debt isn't taxable to them.

Such a deal!

Thousands of student debtors relied on PSLF to manage huge debt burdens. In fact, as Paul Campos correctly noted in his book Don't Go to Law School (Unless), people who graduate from bottom-tier law schools with six-figure student debt have only one option for paying off their student loans: the PSLF program.

Last fall, the first wave of PSLF participants became eligible to have their loan balances forgiven, but Betsy DeVos' Department of Education put impediments in the way and told some student debtors they were not eligible. The American Bar Association sued DOE after it declined to honor an application by ABA employees for public-service loan forgiveness.

Prompted by Democratic legislators--notably Senator Elizabeth Warren--Congress set aside $350 million to pay off student loans owed by people who failed to qualify for PSLF through no fault of their own.

That's a good first step, but $350 million won't fix this problem. As Jason Delisle explained in a 2016 report for the Brookings Institution, the PSLF program has problems DOE didn't anticipate, and those problems will be expensive to fix.

First of all, public service employment as Congress defined it includes anyone who works for federal, state, or local government and anyone who works for a 501(c)(3) nonprofit entity. As Delisle pointed out  (p. 3), that definition encompasses about one quarter of the American workforce.

In fact, nearly all the doctoral students I've taught over the last 25 years work in public sector jobs; and most of them have student-loan debt, which they expect to shed through the PSLF program. For example, one of my recent doctoral graduates accumulated $140,000 in student-loan debt on her journey to obtaining an Ed.D. degree. PSLF is her only escape hatch for shedding this enormous debt.

Without any question, the PSLF program was poorly designed. The category of eligible participants was defined far too broadly.  Although program defenders say PSLF is intended to aid firefighters, police officers, and teachers, it also benefits public-service lawyers, lobbyists, and accountants.

Furthermore, Congress placed no cap on the amount of student debt that can be forgiven under PSLF. At roughly the same time Congress enacted the PSLF program, it approved the Grad PLUS program, which allows graduate students to borrow the entire cost of their graduate or professional education with no dollar limit.

Apparently DOE was surprised by the enormous debt loads carried by people seeking to shed their student loans through PSLF.  But it should have been obvious to everyone that law-school and business-school graduates with $200,000 in student-loan debt and no prospect of a well-paying private-sector job would look to PSLF to manage their debt.

In short, DOE underestimated the number of people eligible for PSLF and the amount of money they owe. Taxpayers are going to spend a lot more on PSLF than DOE anticipated.

So what to do?

In my view, the Department of Education should forgive student-loan debt for everyone who has accumulated 10 years of public service since the PSLF program was enacted in 2007--regardless of whether the PSLF applicant filled out the proper paperwork. And it should allow everyone currently working in  a public service job to participate in the PSLF program and receive loan forgiveness after they've made 120 payments.

And then Congress needs to amend the program to put a cap on the amount of student-loan debt that can be forgiven under PSLF, and it should limit future participation to people working in hard-to-fill public sector jobs--police officers, fire fighters, teachers, etc.

No doubt about it--PSLF is a colossal train wreck; and it will cost the federal government billions of dollars to fulfill the promises Congress made eleven years ago. The Congressional Budget Office estimates that PSLF and income-based repayment programs together will cost taxpayers $12 billion over the next ten years (as reported by Jason Delisle). The $350 million Congress appropriated last March is but a small down payment.

The Public Service Loan Forgiveness Program is a Train Wreck.

References

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

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

Andrew Kreighbaum. New Fix for Public Service Loans. Insider Higher Ed, May 24, 2018.

Andrew Kreighbaum. Senate Democrats want Public Service Loan Forgiveness Fix in budget agreement. Inside Higher Ed, February 16, 2018.

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