Mock v. National Collegiate Student Loan Trust: A peek into the shady world of the private student-loan market

In 2007, Casondra Mock, a Texas resident, borrowed about $20,000 from Union Federal Savings Bank, a Rhode Island institution, to finance her studies at the University of Houston at Clear Lake.  The interest rate was high--almost 14 percent.

Under the terms of the loan, Mock would begin paying  $339 a month beginning in December 2009 and would continue making monthly payments for 20 years.  Had she completed all the payments, she would have paid $81,000--4 times what she borrowed.

The Rhode Island bank packaged Mock's loan into a pool of loans, and sold the pool to National Collegiate Funding, which then sold the pool to a "purchaser trust."  Private student loans that are pooled and sold in this way are sometimes called SLABS--Student Loan Asset Backed Securities.

SLABS are very similar to the home mortgages that were pooled and sold to investors ten years ago. Those pooled mortgages were called ABS--Asset Backed Securities. If you watched the movie The Big Short, you know these ABS were sold to investors as AAA rated securities but in fact contained a lot of nonperforming home loans and were actually junk.  When the homes securing these mortgages began going into foreclosure, the ABS became almost worthless, and the real estate market collapsed.

Mock defaulted on her loan and National Collegiate Student Loan Trust (NCSL) sued her along with Kary Mock, who cosigned the loan. NCSL claimed the Mocks owed $37,086,54, together with accrued interest of $5,645.37 for a total debt of $42,731,91.

The Mocks fought the suit in court, acting as their own lawyers. They argued that the interest rate was usurious, the loan was predatory, and NCSL had not provided proper documentation to support its claim.

The trial court ruled for NCSL, entering a judgment of $37,086.54; and the Mocks appealed.

Justice Harvey Brown, writing for the Texas Court of Appeals (First Circuit) rejected the Mocks' usury argument and their argument that the loan was predatory on its face. But Judge Brown reduced the amount of the judgment to $24,408.72 on evidentiary grounds, ruling that NCSL had not produced documentary evidence to support a larger amount.

Why is this Texas court opinion significant? Three reasons:

1) The case shines a light on the shady private student-loan industry. As we see from the Mock case, banks and financial institutions are marketing private student loans all across the United States, charging high interest rates--far higher than students pay on their federal loans. These loans are then bundled into pools (sometimes called (SLABS) and sold to investors.

2) Private student loans are as difficult to discharge in bankruptcy as federal student loans, which makes them especially attractive to investors.  A lot of fat cats are happy to buy SLABS packed with student loans bearing high interest rates, secure in the knowledge that these loans are almost impossible to discharge in the bankruptcy courts.

3) People taking out private student loans are making bad decisions. We don't know Casondra Mock's circumstances, but surely she made a bad decision when she took out a 20-year loan at 14 percent interest to finance her studies at the University of Houston at Clear Lake. She could have taken out a federal student loan with an interest rate half the rate charged by that Rhode Island bank.

Perhaps Casondra had already maxed out her federal student loans and needed more money to pursue her studies. But even if that were the case, surely there was a better way to address her financial needs than taking out a 20-year loan at 14 percent interest.

Acting at the behest of the big banks, Congress put private student loans under the "undue hardship" standard in the 2005 Bankruptcy Reform Act. Some reform!  Congress should repeal the "undue hardship" provision for both federal and private student loans as numerous policy experts have urged. And I'm sure Congress will correct its mistake someday--someday when pigs fly and the lions lie down with the lambs.

Someday, Congress will repeal the "undue hardship" clause in the Bankruptcy Code.

References

Mock v. National Collegiate Student Loan Trust, No. 01-17-00216-CV (Tex. Ct. App. July 10, 2018).

Student loan rates are going up--compounding misery for suffering college borrowers

James Carville, who was once President Bill Clinton's political strategist, famously remarked: "It's the economy, stupid!"

But Carville's one-liner needs updating. For student-loan debtors, "It's the interest, stupid!"

And student-loan interest rates are going up. For undergraduate student loans, the rate has risen to 5.05 percent, a 13 percent increase over current rates.

For graduate students, the rate rose to 6.60 percent, up from the last year's rate of 6.0 percent.

And rates for Parent PLUS loans are going up as well. As of July 1, the interest rate on Parent PLUS loans is 7.6 percent.

A Forbes article suggests the increase is no big deal. An undergraduate who takes out $10,000 in federal loans this year will only pay $349 more over ten years than under last year's interest rate. That's less than three bucks a month.

But let's think again. Interest rates on student loans are pretty damn high; why should they go higher? Students taking out federal loans to finance their college education pay a higher interest rate than they would for a car loan or even a house loan. And remember, the current interest rate on a 10-year government bond is only 2.85 percent. So how does the federal government get away with loaning money to students' parents at an interest rate of 7.6 percent?

Here's the real problem with interest rates on student loans: the interest compounds on outstanding loans until the loans are paid off. For some student debtors, interest on their student loans compounds while they are in school, which means they will owe more money than they borrowed by the time they graduate.

Even more concerning, millions of borrowers don't find good jobs after they graduate and are unable to immediately start making their monthly loan payments. This forces them to apply for economic hardship deferments, which are notoriously easy to get. But borrowers whose loans stay in deferment for two, three, four years or more will see their loan balances go up markedly.

And the story is the same for people who enroll in 20- or 25-year income-contingent repayment plans (ICRPs). Almost all these folks are making monthly payments so low they are not paying down accrued interest. Consequentially, their loans are negatively amortizing, which means ICRP participants are seeing their loan balances get larger with each passing month, even though they are making regular monthly payments.

Remember Mark Meru, the dentist who borrowed $600,000 to go to dentistry school and now owes a million dollars? He's in an income-based repayment plan that set his monthly payment at less than $1,600.   But interest is accruing at the rate of almost $4,000 a month. By the time he finishes his 25-year repayment plan, Dr. Meru will owe $2 million!

Albert Einstein observed that compound interest is the eighth wonder of the world. People who understand that earn it; and people who don't understand, pay it.

Apparently, millions of college-educated Americans don't understand compound interest. Otherwise, they never would have allowed themselves to get into debt so deep due to student loans that they will never pay off.

"It's the interest, knuckleheads!"

References

Zack Friedman. Student Loan Rates Will Rise 13% This Summer. Forbes.com, May 22, 2018.

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

Michelle Singletary gives good financial advice to young people about student loans, and here are my two cents (think La Brea tar pits)

Michelle Singletary, a syndicated columnist for the Washington Post, gives good advice  to young people about managing debt--including student loans. She published a very good article awhile back that contained two good pieces of advice. I will summarize her suggestions and add my own two cents.

First, Singletary challenges the conventional wisdom that young people should begin saving for retirement as early as possible--while still in their 20s.  "Millennials' money is often too tight," she counseled, "and for the many who have student loans, they may be best served spending the first years aggressively paying off this debt."

I agree completely. It makes no sense for young people to put money in IRAs or other retirement accounts if they aren't managing their student loans. After all, if they accumulate student-loan debt that becomes so large they can't make their monthly payments, they'll wind up in 25-year income-based repayment plans, which may prevent them from ever retiring.  It is absolutely critical for millennials to get their student loans paid off as quickly as possible.  For young people, there will be plenty of time later to save for retirement after they pay off their student loans.

Singletary also signaled her disagreement with commentators who lament the high percentage of young adults who live with their parents. It is true that more people in their 20s are living with Mom and Pop; 28 percent, according to Singletary, up from just 19 percent in 2016.

But that may not be a bad thing. If a young person can economize by living with parents, why not do so? That leaves more money to save for a down payment on a house or for paying student loans off early.

Now here are my two cents.

When taking out college loans, students should keep in mind the possibility that they won't find a good job after graduating. If their student loan debt is modest, they can probably make their monthly payments even if they are in a low paying job. But if they borrowed a lot of money and can't make the initial monthly payments, they will be forced to apply for an economic hardship deferment, which are very easy to get.

Those deferments excuse borrowers from making monthly loan payments, but compound interest accrues on the principal. Borrowers who put student loans in deferment for three years will find their loan balances will have grown substantially.

Then--if they can't make regular payments on the larger balance, student borrowers will be pushed into 20- or 25-year income-based repayment plans. In my view, that is a disastrous outcome for young people who took out student loans to improve the quality of their lives, not fall into a lifetime of indebtedness.

And here is some more of my two cents. Never take out private student loans from Wells Fargo, Sallie Mae or any of the other blood suckers who offer private student loans. Those loans are just as hard to discharge in bankruptcy as federal student loans.  And when I say never take out private student loans, I mean never.

Finally, to reiterate advice I have given tirelessly for many years, don't ask your parents to take out a Parent PLUS loan to finance your college studies; and don't ask them to co-sign any of your student loans. If you love Mama and Daddy, don't suck them into a veritable La Brea tar pit of perpetual student-loan indebtedness, especially if you are already in the tar pit yourself.

La Brea Tar Pits

References

Michelle Singletary. Millennials get plenty of financial advice-but most of it is wrong. Herald-Tribune, May 22, 2018.

Parents join their children in Student-Loan Siberia, taking out bigger and bigger Parent PLUS loans to finance their children's bad college choices

Remember the movie Fiddler on the Roof? Perhaps the most poignant scene is the one in which Tevye waits with his daughter Hodel for the train that will take Hodel to Siberia. As you recall, Hodel married Perchik, a Russian revolutionary, without her father's permission. Perchik then got himself arrested and exiled to the Siberian wilderness.

Did Hodel say: "Good luck, honey!" "Don't forget to write!"  Or, "I told you not to become a revolutionary, but you didn't listen!"

No, she didn't. Instead, Hodel hopped a train and joined Perchik in Siberia.

Something similar is happening with Parent PLUS loans. Students are taking out more and more federal loans to finance their college studies, and many are taking out the maximum amount they are allowed to borrow for their undergraduate education--$31,000. In fact, 40 percent of undergraduate borrowers have loans totally $31,000 before they begin their senior year.

What to do? Many are turning to their parents to fill the gap. In 2015-2016, Parent PLUS loans averaged $33,291, up 14 percent in just four years. In fact, two thirds of parents who took out Parent PLUS loans in 2015-2016 did so to finance their children's undergraduate education.

As Mark Kantrowitz explained in a New York Times interview, "Parents are a pressure-relief valve for when students hit the Stafford loan limits."

I suppose that's one way of putting it. But really, the rise in Parent PLUS loans means some parents are bearing bigger student-debt loads than their children. And remember--Parent PLUS loans are as difficult to discharge in bankruptcy as student loans. No student loan can be discharged unless the debtor can show "undue hardship," a very tough standard to meet.

Some parents who take out Parent PLUS loans will find them very difficult to repay. In fact, the lending standards for issuing these loans are very low.  Parent debtors who lose their jobs, develop serious illnesses, or have various kinds of family emergencies may find it almost impossible to make payments on their Parent PLUS loans.  And bankruptcy will probably not be an option.

And let's face facts. If students cannot finance their college choices without pushing their parents into debt, they chose the wrong college.

So Mom and Dad, think of Hodel before you take out Parent PLUS loans to finance your children's college education. If your children cannot pay back their own student loans, they may be forced into long-term income-based repayment plans that last 20 or even 25 years. In which case, your children will be entering Student-Loan Siberia--saddled by debt for most of their working lives.

And, Mom and Dad, if you take out Parent PLUS loans, you may wind up like Hodel--headed for Student-Loan Siberia as well. If that happens it will be because your darling child made a bad choice about where to go to college and you foolishly agreed to help foot the bill.

Goodbye, Dad. Perchik made a dumb decision and I'm going to join him in Siberia.

References

Tara Siegel Bernard and Karl Russell. The New Toll of Student Debt in 3 Charts. New York Times, July 11, 2018.

Alexandra Acosta-Coniff v. ECMC: A single mother wins bankruptcy relief from student loans but sees victory snatched away on appeal

In 2013, Alexandra Acosta-Conniff, an Alabama school teacher and single mother of two children, filed an adversary proceeding in an Alabama bankruptcy court, hoping to discharge student loans that had grown to $112,000.  She did not have an attorney, so she represented herself in court.

At her trial,  Judge William Sawyer applied the three-part Brunner test to determine whether Acosta-Conniff met the "undue hardship" standard for having her student loans discharged in bankruptcy.

First, Judge Sawyer ruled, Conniff could not pay back her student loans and maintain a minimal standard of living for herself and her two children. Thus she met the first part of the Brunner test.

Second, Conniff's economic circumstances were not likely to change in the foreseeable future. Conniff was a rural school teacher, Judge Sawyer pointed out, who could not expect a significant rise in income. Although she had obtained a doctorate in education, that doctorate had not paid off financially.

Third, Judge Sawyer ruled, Conniff had handled her student loans in good faith. She had made monthly payments over several years and she had obtained deferments from making payments--deferments she was eligible to receive. In Judge Sawyer's view, Conniff met the good-faith requirement of the Brunner test.

In short, Judge Sawyer determined, Conniff qualified for bankruptcy relief under the Bankruptcy Code's "undue hardship" standard as interpreted by Brunner.  Accordingly, the judge discharged all of Conniff's student-loan debt.

ECMC appealed, and Judge Keith Watkins reversed. Fortunately, retired bankruptcy judge Eugene Wedoff volunteered to represent Conniff without charge, and Wedoff and his associates took her case to the Eleventh Circuit Court of Appeals.

In 2017, four years after Conniff filed her adversary proceeding, the Eleventh Circuit reversed the trial court,  directing Judge Watkins to review Judge Sawyer's ruling under the "clear error" standard. In other words, unless Judge Sawyer had committed clear error in deciding for Conniff, Judge Watkins was bound to uphold Sawyer's decision. The Eleventh Circuit remanded the case back to Judge Watkins to straighten things out.

In January 2018, Judge Watkins issued his second opinion in Conniff's case, and he concluded that Judge Sawyer had indeed committed clear error when he ruled in Conniff's favor. Judge Watkins' opinion is a bit convoluted, but basically he said Judge Sawyer made a mistake in failing to determine whether Conniff was eligible for an income-contingent repayment plan (ICRP).

In Judge Watkins' opinion, if Conniff can make even small loan payments under an ICRP and still maintain a minimal standard of living, she is not eligible for bankruptcy relief.

So what does this mean?

It means Alexandra Acosta-Conniff must return to bankruptcy court a second time--more than three years after her first trial. Apparently, Judge Sawyer will not schedule a second trial; instead, he has asked Conniff and ECMC to submit proposed findings of facts. At some point, Judge Sawyer will issue his second opinion on Conniff's case.

Conniff owed $112,000 in 2015, when she was 44 years old. Her debt has grown over the last three years due to accrued interest, and Conniff is older. She is now 47 years old.

What does the future hold for Alexandra Acosta-Conniff? More litigation.

If Conniff wins her second trial, ECMC, ruthless and well financed, will undoubtedly appeal again; and the case will ultimately go back to the Eleventh Circuit a second time. Conniff now has an able lawyer, so if she loses before Judge Sawyer, she will likely appeal. So--win or lose--Conniff is in for at least two more years of stressful litigation. When this is all over, Conniff will likely be 50 years old.

Here's my take on Conniff's sad odyssey through the federal courts. First, Judge Watkins' most recent decision is deeply flawed. In Watkins' view, a student-loan debtor who can make even small loan payments under an ICRP while maintaining a minimal standard of living cannot discharge her student loans in bankruptcy: period.

But if that were true, then no student-loan debtor is eligible for bankruptcy relief. In several cases, ECMC or the U.S. Department of Education has argued that a student-loan debtor  living at or below the poverty line should be denied bankruptcy relief  and required to enter into an ICRP even though the debtor would be required to pay zero. In fact, ECMC and DOE have been arguing for years that basically every destitute student-loan debtor should be put in an ICRP and denied bankruptcy relief.

Do want some examples? Roth v. ECMC (9th Cir. BAP 2013), Myhre v. U.S. Department of Education (Bankr. W.D. Wis. 2013), Abney v. U.S. Department of Education (Bankr. W.D. Mo. 2015), Smith v. U.S. Department of Education (Bankr. D. Mass. 2018).

The Roth case illustrates the insanity of this point of view. In that case, ECMC fought bankruptcy relief for Janet Roth, an elderly retiree with chronic health problems who was living on less than $800 a month in Social Security benefits. Put her in an ICRP, ECMC insisted, even though she would be required to pay nothing due to her impoverished circumstances.

The Ninth Circuit's Bankruptcy Appellate Panel pointed out the absurdity of ECMC's position. It would be pointless to put Roth in an ICRP, the court ruled. "[T]he law does not require a party to engage in futile acts."

Forcing Alexandra Acosta-Conniff into an ICRP, which Judge Watkins obviously desires, is a futile act. She will never pay off her student loans, even if she makes small monthly income-based payments for the next 25 years.

Acosta-Conniff is a big, big case. If Judge Watkins' hardhearted view prevails, then bankruptcy relief for student-loan debtors is foreclosed in the Eleventh Circuit. If the compassionate and common-sense spirit of Judge Sawyer's original 2013 opinion is ultimately upheld, then distressed student-loan debtors like Alexandra Costa-Conniff will get the fresh start that the bankruptcy courts were intended to provide.

The Eleventh Circuit Court of Appeals will ultimately have to look at Alexandra Acosta-Conniff's case a second time.  But her next trip to the Eleventh Circuit is likely at least two years away.

The Honorable Judge Keith Watkins

References

Acosta-Conniff v. ECMC, 536 B.R. 326 (Bankr. M.D. Ala. 2015).

ECMC v. Acosta-Conniff, 550 B.R. 557 (M.D. Ala. 2016).

ECMC v. Acosta-Conniff, 686 Fed. Appx. 647 (11th Cir. 2017).

ECMC v. Acosta-Conniff, 583 B.R. 275 (M.D. Ala. 2018).

Maxine Waters wants Americans to hassle Trump cabinet members in restaurants. Perhaps our politicians want to distract Americans from our real problems--like the student-loan crisis

Stephanie Wilkinson, owner of the Red Hen, a trendy eatery in western Virginia, asked Sarah Huckabee Sanders and her family to leave her restaurant. Why? Because Sanders works for the Trump administration.

"I explained that the restaurant has certain standards that I feel it has to uphold, such as honesty, and compassion and cooperation," Wilkinson told the Washington Post.

Good to know! If I ever make a reservation at the Red Hen, I'll keep my surly, callous, and truculent character to myself. I would hate to miss out on a $100 vegetarian dinner just because I failed a background check.

California congresswoman Maxine Waters publicly applauded the Red Hen's seating policy and urged her supporters to hound President Trump's cabinet members wherever they appear.  “If you see anybody from [the Trump] Cabinet in a restaurant, in a department store, at a gasoline station, you get out and you create a crowd and you push back on them and you tell them they’re not welcome anymore, anywhere."

President Trump called Waters "an extraordinarily low IQ person," but I disagree. Congressman Waters and most of the nation's other politicians--Democrats and Republicans--are trying to distract Americans from thinking about the nation's real problems--massive government debt, including the nation's budget deficit, the states' unfunded pension liabilities, and the nation's train wreck of a student loan program.

California alone has $1.3 trillion in government debt, and the state's unfunded pension obligations are staggering. The national deficit is $21 trillion, and the student-loan program has generated $1.5 trillion in outstanding student loans.

Distracting the public from massive public debt will continue working until it doesn't. And when Americans finally confront this crisis, they will find it a whole lot more distressing than Sarah Huckabee Sander's appearance at a snooty restaurant in western Virginia.

The Red Hen: "We reserve the right to refuse service to people we disagree with."

References

Patrick Gleason. California faces a $1 trillion unfunded pension liability and lawmakers focus on foam and plastic straws. Orange County Register, April 6, 2018.

McKenna Moore. Rep. Maxine Waters Tells Supporters to Harass Trump Cabinet Members. Fortune magazine, June 25, 2018.

Avik Selk and Sarah Murray.  The owner of the Red Hen explains why she asked Sarah Huckabee Sanders to leave. Washington Post, June 25, 2018.

Should courts look for bad faith when distressed student-loan debtors ask for bankruptcy relief? Further reflections on Smith v. Department of Education

Distressed debtors cannot discharge student loans unless they can show their loans constitute an "undue hardship" to themselves and their dependents. Congress did not define undue hardship in the Bankruptcy Code, so it was left to the courts to define the term.

Most courts have adopted the Brunner test for determining when a student loan is an undue hardship that can be discharged in bankruptcy. That test has three parts:

1) Can the debtor pay back the loan while maintaining a minimal standard of living?
2) Will the debtor's financial circumstances change during the lifetime of the loan?
3) Did the debtor handle his or her loans in good faith?

In Smith v. Department of Education, decided a few months ago, Judge Frank Bailey, a Massachusetts bankruptcy judge, explicitly criticized the Brunner test's  "good faith" component:

[A]ny test that allows for the court to determine a student debtor's good or bad faith while living at a subsistence level, virtually strait-jacketed by circumstances, displaces the focus from where the statute would have it: the hardship. It also imposes on courts the virtually impossible task of evaluating good or bath faith in debtors whose range of options is exceedingly limited and includes no realistic hope of repaying their loans to any appreciable extent. . .(p. 566)

 Judge Bailey argued for a simpler and fairer standard for determining when a student loan can be discharged in bankruptcy: "If a debtor has suffered a personal, medical, or financial loss and cannot hope to pay now or in the reasonably reliable future," the judge reasoned, "that should be enough" (p. 565) (italics supplied).

Eliminating the good faith component of the Brunner test would have a huge impact on student-loan bankruptcy jurisprudence because the Department of Education and its thug debt collectors almost always argue that a debtor filed for bankruptcy in bad faith. And this is ironic because it is the Department of Education, not student-loan debtors, that repeatedly demonstrates bad faith in the bankruptcy courts.

Let's take the Smith case as an example:

1) First of all, the U.S. Department of Education has publicly proclaimed it will not oppose bankruptcy relief for student debtors who are disabled. Mr. Smith is disabled; and Smith and his mother subsist entirely on Smith's monthly disability check, food stamps, and his mother's tiny Social Security income. Thus, DOE was opposing Mr. Smith's plea for bankruptcy relief in direct contradiction to DOE's own policy. In my opinion, that shows DOE's bad faith.

2) In a 2015 letter, a Department of Education official said DOE would not oppose bankruptcy relief when it made no economic sense to do so. Smith's adversary proceeding stretched out over five days, taking up Judge Bailey's time; and both Smith and DOE had lawyers. (In fact, DOE had two lawyers.) Smith only borrowed $29,000; and the litigation expenses almost certainly exceeded that amount. In my view, DOE's decision to chase Smith into bankruptcy court is additional evidence of bad faith.

3) Finally, DOE insisted Smith should be put in a long-term income-based repayment plan, even though it admitted Smith's income was so low that his monthly loan payments would be zero. So what was the point of fighting Smith in bankruptcy court? Again, this is more evidence of DOE's bad faith.

In fact, the Department of Education and the student loan guaranty agencies (ECMC in particular) almost always argue that a distressed student-loan debtor filed for bankruptcy in bad faith. And this is true even when the debtor is hovering on the brink of homelessness.

After all, in the Myhre case, DOE opposed student-loan debt relief for a quadriplegic whose expenses exceeded his income.  In the Abney case, DOE fought Kevin Abney, who was so poor he did not own a car and traveled to work on a bicycle. And in the Stevenson case, ECMC objected when Janice Stevenson, a woman with a record of homelessness and who lived in subsidized housing, tried to discharge almost $100,00 in student loans.

So Judge Bailey is right. The federal courts should stop asking whether down-and-out student-loan debtors handled their student loans in good faith. The only important questions are these: Can the debtor pay back his or her student loans? Will the debtor ever be able to pay back those loans?

And if the courts continue to insist on looking for bad faith, they should look for it by the Department of Education, ECMC, and the entire gang of government-subsidized debt collectors.

References

Jillian Berman. Why Obama is forgiving the student loans of almost 400,000 people. Marketwatch.com, April 13, 2016.

Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015. 

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

Michael Stratford. Feds May Forgive Loans of Up to 387,000 Borrowers. Inside Higher Ed, April 13, 2016. 

Smith v. U.S. Department of Education (In Re Smith), 582 B.R. 556 (Bankr. D. Mass 2018).

Stevenson v. ECMC, Case No. 08-14084-JNF, Adv. P. No. 08-1245 (Bankr. D. Mass. August 2, 2011).

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).