We're checking our list! We're checking it twice! Has Navient been naughty? Chinnock v. Navient Corporation

Julie Anne Chinnock sued Navient Corporation, the U.S. Department of Education, and a Navient student-loan trust a few days ago, seeking two forms of relief. Ms. Chinnock wants compensation for an invasion of her privacy and a declaratory judgment that she does not owe Navient, DOE, or the trust any money.

As Chinnock said in her complaint, the controversy is quite simple and easy to resolve. "Defendants claim that they own certain student loans under which [Chinnock] is indebted to them, and [Chinnock] denies that defendants own such loans."

This case is reminiscent of the old robo-signing scandal during the home-mortgage crisis about ten years ago. Investors bought pools of home mortgages that were on the verge of default; but when the investors tried to foreclose on the homes, they couldn't prove they owned the underlying debt.

Apparently, Navient is in the business of packaging student loans into asset-backed securities and marketing them to investors. A lot of these student loans are going into default, but the buyers of those packaged loans are sometimes unable to show they have an ownership interest in the debt.

As Ms. Chinnock relates in her complaint, Navient is a bad actor:

Navient has a proven reputation for its predatory lending and collection practices. A 2014 Consumer Finance Protection Bureau Report found Navient's illegal loan servicing practices to include: (1) attempts to collect debts not owned by it; (2) unfounded negative threats (i.e. damage to borrower's credit), and (3) failing to correctly apply payments, among other predatory practices.

Ms. Chinnock also alleges that in 2017, "Navient was the most complained-about student loan company in all 50 states." She says that Navient was named in 530 federal lawsuits over a three-year period and that it was fined $97 million by the U.S. Justice Department for illegally charging students excessive interest rates.

Regarding her own complaint against Navient, Chinnock claims she paid off all her student loans in the amount of about $190,000 and was never delinquent on any of them (page 15 of her complaint). Nevertheless, in August 2018, Navient claimed she owed on eight additional loans totally several hundred thousand dollars.  Chinnock demanded proof that Navient's principals owned the loans, and Navient refused to provide any documentation.

Is this case a big deal? It is a VERY big deal. As Chinnock's lawsuit illustrates, lenders in the real estate industry and the student-loan business have gone to court to collect on debts they can't prove they own. Basically, they relied on a "take-my-word-for-it-loan-ownership ploy." For a while, the courts played along, allowing so-called lenders to get judgments against people who denied they owed anything.

But it is a basic principle of law that a creditor must prove ownership of a debt in order to get a judgment against a debtor. So far at least, Navient hasn't produced a shred of evidence that Julie Anne Chinnock owes it money.

If Ms. Chinnock wins her lawsuit, Navient should get ready for plenty more.

References

Julie Anne Chinnock v. Navient Corporation, Navient Solutions, Navient Student Loan Trust 2014-3, & the United States Department of Education, Case: 1:18-cv-02935. Verified Complaint (Ohio Ct. Common Pleas, Dec. 20, 2018).

LSU Football Player Kills a Man in Scotlandville: Will He Still Play in the Playstation Fiesta Bowl?

An LSU football player killed Kobe Johnson, an 18-year-old man, yesterday evening in Scotlandville.

This is what we know. Clyde Edwards-Helaire, an LSU running back, and Jared Small, a linebacker, were trying to sell an "electronic item" when Johnson allegedly tried to rob them. One of the players--police haven't said which one--shot Johnson multiple times and he died in the backseat of a late-model Chevrolet Silverado truck.

The LSU athletes called 911 and stayed at the scene until the police arrived. Joe Alleva, LSU's Vice Chancellor and Director of Athletics, called the incident "traumatic." Three lawyers showed up to represent Edwards-Helaire and Small, who claim self-defense.

As the Baton Rouge Advocate succinctly put it, there are "several unknowns about the incident."

First, the newspaper asked, which footballer player killed Johnson?

Second, what types of weapons were recovered and who owns them?

And finally--and most importantly--will Edwards-Helaire and Small suit up for the Playstation Fiesta Bowl on New Year's Day?

And I have a few questions of my own:

Who is paying the three lawyers who miraculously showed up to represent the football players? Perhaps LSU's Mr. Alleva knows the answer to that question.

Who owns the stylish pickup truck where Johnson bled to death?

And finally, was it necessary for the football player (Small or Edwards-Helaire) to shoot Johnson multiple times?

Of course all these questions are trivial when compared to what's at stake: The 2019 Playstation Fiesta Bowl, which is only a week away.  After all, how can we compare the life of an obscure kid from North Baton Rouge to the upcoming epic battle between the LSU Tigers and the University of Central Florida?

Surely football fans all over Louisiana are down on their knees in prayer. Please God, if an LSU football player killed someone on Saturday night, let it be Mr. Small, who is only a walk-on linebacker, and not Edwards-Helaire, who is a star running back who probably has a great career ahead of him if he goes pro.

Death scene (photo credit: Travis Spradling, Baton Rouge Advocate)

You should die before you pay off your student loans: Estate planning for elderly student-loan debtors

Steve Rhode posted an essay yesterday titled "Make Sure You Die Before Your Parent Plus and Federal Student Loans Are Forgiven." As Mr. Rhode explained, the federal government cancels all unpaid student loans owed by debtors who die before their loans are repaid. The cancelled debt is not a burden on the deceased debtor's estate.

On the other hand, people in 20- and 25-year income-based repayment plans (IBRPs) who receive loan forgiveness when they complete their repayment terms, will owe federal taxes on the amount of their forgiven loans. Why? Because the IRS considers a forgiven loan to be taxable income. If that tax bill comes due and the student-loan borrower can't pay it before dying, the unpaid tax becomes a claim on the decedent's estate.

"So," Mr. Rhode advises, "if you are older it may make more sense and cost less money overall if you extend out the repayment term past when you estimate you will die. When you pass, the student loan can pass with you."

Steve Rhode is absolutely right. You may think this is a technical detail of the student-loan program that only concerns a few people. But you would be wrong.

More than 7 million people are in IBRPs, and the number grows with each passing month. Nearly all these people will not have payed off their student loans before their repayment terms come to an end due to accruing interest. That means nearly all 7 million will receive tax bills when their accumulated student-loan debt is forgiven.

And these tax bills could be enormous. Remember Mike Meru, who borrowed $600,000 to go to dental school and is paying it back in an IBRP? The Wall Street Journal estimated that his debt would grow to $2 million by the time he completes his income-based repayment plan due to accruing, compound interest. That $2 million will be forgiven but it will also be taxable income for Dr. Meru.

It is true the IRS will not assess a forgiven-loan tax on people who are insolvent when their student loans are forgiven. But that's no comfort. How many people want to pay on student loans for 25 years and be insolvent on the day their loans are forgiven?

Of course there is a simple solution to this problem: Congress can pass legislation that would remove the tax liability  of people who complete IBRPs and have their student loans forgiven. In fact, this fix could probably be achieved through a federal regulation without Congressional action.

Alternatively, bankruptcy courts could simply discharge student-loan debt held by overburdened student-loan borrowers.  Some federal bankruptcy courts have concluded that IBRPs are not a feasible alternative to bankruptcy relief. They have countenanced the tax consequences of IBRPs, and some have recognized the enormous mental stress that debtors experience when they are burdened by student loans that can never be repaid. For example, the bankruptcy courts in the Fern case, the Martin case, and the Abney case have taken this sensible and compassionate view.

Perhaps Congress will do the right thing and fix this problem. After all, the Democrats will control the House of Representatives in January. If they were to present a bill to remove the tax consequences of forgiven student loans, what Republican would oppose it?

We shall see. In the Metz case, Judge Robert E. Nugent referred to an IBRP as a "pay-as-she-earns time bomb," and he is certainly correct. What a tragedy if this nasty time bomb goes off for millions of IBRP participants, when it could be so easily defused.

References

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

Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016), aff'd, 563 B.R. 1 (8th Cir. B.A.P. 2017).

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

Vicky Jo Metz v. Educational Credit Management Corporation, 589 B.R. 750 (D. Kan. 2018).

Martin v. Great Lakes Higher Education Group and Educational Credit Management Corporation (In re Martin), 584 B.R. 886 (Bankr. N.D. Iowa 2018).

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

Steve Rhode, Make Sure You Die Before Your Parent Plus and Federal Student Loans Are Forgiven. Get Out of Debt Guy (blog), December 17, 2018.

Good News out of Kansas: A compassionate bankruptcy judge grants a 59-year-old debtor a partial discharge of her student loans

The Remarkable Case of Vicky Jo Metz

Twenty-seven years ago,Vicky Jo Metz, took out $16,613 in student loans to go to community college. Over time, she paid back 90 percent of what she borrowed--almost $15,000.

But interest accrued at the rate of 9 percent, and by the time Metz came to bankruptcy court in 2018, her debt had quadruped--that's right, quadrupled--to $67,277!

Educational Credit Management Corporation, the federal government's most ruthless student-loan debt collector, opposed discharging Metz's loans.  Put Ms. Metz in a 25-year income-based repayment plan, ECMC argued.

But Kansas Bankruptcy Judge Robert E. Nugent rejected ECMC's heartless argument.  Ms. Metz is 59 years old, Judge Nugent pointed out. By the time she finishes a 25-year IBRP, she will be 84.

ECMC testified that Metz's monthly payments under a 25-year IBRP would only be $203. But, Judge Nugent observed, such a payment is about $300 a month less than the amount necessary to pay the accruing interest. Thus, after making minimal payments for 25 years, Metz would owe $152,277.88--nine times more than she borrowed.

Under the terms of an IBRP, Ms. Metz's loan balance would be forgiven after 25 years--the entire $152,000.  But the forgiven debt would be taxable to her as income. "That," Judge Nugent remarked with powerful understatement, "could generate considerable tax liability for a retired 84-year-old living on social security."

Judge Nugent sensibly concluded that Metz could not pay back the $67,000 she currently owed while maintaining a minimal standard of living. He also concluded that Metz's financial situation was unlikely to change. In fact, with very little retirement savings, Metz's income would probably go down because she would be living almost solely on Social Security in her retirement years.

Finally, Judge Nugent determined that Metz had made a good faith effort to repay her student loans. "She has paid more than $14,000 toward this loan," he noted, "not a dime of which has gone to principal."

In short, Judge Nugent summarized: "Ms. Metz will simply never be able to afford to make a significant monthly payment on her student loan." Furthermore, requiring Metz to pay the accumulated interest "would result in undue hardship to her now and in the future.

Nevertheless, Judge Nugent stated, Metz could pay back the $16,613 she originally borrowed. So this is what Judge Nugent ordered:

Rather than be yoked to a pay-as-she-earns time bomb, Ms. Metz should instead be required to pay the principal balance of the loan, $16,613.73. Doing that would not impose an undue hardship on her within the meaning of [the undue hardship standard in the Bankruptcy Code]. Therefore, that amount is excepted from her discharge in this case and the rest of her student loan is discharged. Ms. Metz should arrange to make a monthly payment that will amortize that debt over a reasonable 5 to 10-year period.

Why the Metz Case is Important

Vicky Jo Metz's case is important for two reasons. First, Judge Nugent rejected ECMC's argument, which it has made hundreds of times, that  a distressed student-loan debtor should be forced into an income-based repayment plan as an alternative to bankruptcy relief.  As Judge Nugent pointed out, an IBRP makes no sense at all when the debtor is older and the accumulated debt is already many times larger than the original amount borrowed.

Indeed ECMC's argument is either insane or sociopathic. Why put a 59-year old woman in a 25-year repayment plan with payments so low that the debt grows with each passing month?

Second, the Metz case is important because it is the second ruling by a a Kansas bankruptcy judge that has canceled accrued interest on student-loan debt. In Murray v. ECMC, decided in 2016, Alan and Catherine Murray, a married couple in their late forties, filed for bankruptcy in an effort to discharge $311,000 in student loans and accumulated interest.

The Murrays took out a total of $77,000 in student loans back in the 1990s, and they made monthly payments totally 70 percent of what they borrowed. But, much like Vicky Jo Metz, the Murrays saw their student-loan debt grow larger and larger over the years until their debt totaled $311,000--four times what they borrowed.

Fortunately for the Murrays, Judge Dale Somers, a Kansas bankruptcy judge, granted them a partial discharge of their massive debt. Judge Somers ruled that the Murrays had managed their student loans in good faith, but they would never be able to pay back the $311,000 they owed. Very sensibly, he reduced their debt to $77,000, which is the amount they borrowed, and canceled all the accumulated interest.

Conclusion

Judge Nugent and Judge Somers have grasped the essence of the student-loan crisis. Millions of Americans are seeing their student-loan indebtedness double, triple and even quadruple as interest accrues and compounds. Vicky Jo Metz, the Murrays, and people in similar positions will never pay back their massive student-loan debt.

Putting these poor souls into 25-year income-based repayment plans denies them the fresh start that the bankruptcy courts were created to provide. Under the government's income-based repayment program, this debt will be forgiven after 25 years, but the Internal Revenue Service considers the amount of the forgiven debt to be taxable income.

This is nuts. Judge Somers and Judge Nugent demonstrated compassion and common sense when they canceled accumulated interest on massive student-loan debt owed by the Murrays and Ms. Metz. Let us hope other bankruptcy judges will begin following their example.

References

In re Murray, 563 B.R. 52, 60 (Bankr. D. Kan. 2016), aff'd sub nom. Educ. Credit Mgmt. Corp. v. Murray, No. 16-2838, 2017 WL 4222980 (D. Kan. Sept. 22, 2017).

Vicky Jo Metz v. Educational Credit Management Corporation, 589 B.R. 750 (D. Kan. 2018).

Public Service Loan Forgiveness Program is a "disaster" according to DOE official: A hurricane is coming to PSLF

In a recent speech, Secretary of Education Betsy DeVos called the federal student loan program "a thunderstorm loom[ing] on the horizon." Only 20 percent of borrowers are paying down the principal and interest on their loans, DeVos said, even as students borrow more and more money to finance their higher education.

Comparing the student loan program to a thunderstorm may be an understatement. It might be more accurate to compare the program to a hurricane bearing down on the Gulf Coast at 150 miles an hour. And--extending my hurricane analogy a bit further, we might say the Public Service Loan Forgiveness Program (PSLF) is the "dirty side of the storm."  In fact, Diane Jones, a senior DOE official, called PSLF a "disaster" earlier this week. Jones said the Department of Education does not support PSLF, although it will meet its legal obligations to administer the program.

But DOE is not administering the PSLF program, or--to be more accurate--DOE is not administering the program competently.  As has been widely reported, DOE had processed 28,000 PSLF loan forgiveness applications by late September and only approved 96! What's going on?

Personally, I think DOE number crunchers looked at PSLF and realized that the program will be extremely expensive if it is administered correctly--shockingly expensive. DeVos and her senior minions know the program will cost taxpayers billions of dollars if DOE processes loan-forgiveness applications in accordance with PSLF participants' reasonable expectations.

As Jason Delisle said in a 2016 paper for the Brookings Institute, by at least one interpretation, PSLF's definition of eligible participants is quite broad. Delisle estimates that one quarter of the entire American workplace is a public service worker and all these people are eligble to participate in PSLF if they have student loans.

Delisle cited a 2015 General Accountability Office report in support of  his conclusion. On page 10, footnote 19, GAO said borrowers are eligible for loan forgiveness under PSLF if they are "employed full time by a public service organization or serving in a full-time Americorps or Peace Corps position."

What is a "public service organization? This is what GAO said:

Qualified public service organizations include those in federal, state, local government; 501(C) nonprofits; and other nonprofit organizations providing a variety of public services. 

That definition is a lot broader than the common perception that PSLF is open primarily to nurses, police officers, and first responders. I know for a fact that many student borrowers who work at public universities and community colleges believe they are eligible for loan forgiveness through PSLF.

We will get some guidance about who is eligible for PSLF when the American Bar Association's lawsuit against DOE is decided. ABA sued DOE in 2016 when it denied PSLF eligibility to public-service lawyers working under ABA's auspices. ABA wants a federal court to rule that its employees are eligible for PSLF; and ABA and DOE have both filed motions for summary judgment.

If a federal court declares ABA to be a public service organization whose employees are eligible for PSLF student-loan forgiveness that will be an indication that DOE's narrow interpretation of a public service organization is far too narrow and legally incorrect.

In the meantime, almost a million people have applied to have their student loans certified as eligible for PSLF.  Of the 28,000 people who filed for loan forgiveness since last September, DOE granted forgiveness to less than 1 percent. DOE declared that seventy percent of the applicants were ineligible.

Millions of people working in the public sector took out student loans in the reasonable belief they are eligible for loan forgiveness after ten years of public service.

DOE has taken the position that most of these student-loan borrowers are wrong. No wonder DOE Undersecretary Diane Jones calls PSLF a "disaster."

PSLF is a "disaster" according to DOE official

References

American Bar Association v. U.S. Department of Education, Complaint for Declaratory and Injunctive Relief, Case No. 1:16-cv-02476-RDM (D.D.C. Dec. 20, 2016).

Stacy Cowley. 28,000 Public Servants Sought Student Loan Forgiveness. 96 Got It. New York Times, September 27, 2018.

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.

Betsy DeVos. Prepared Remarks by U.S. Secretary of Education Betsy DeVos to Federal Student Aid's Training Conference. November 27, 2018.

Casey Quinlan. Education Department official slams Public Service Loan Forgiveness program as 'disaster.' thinkprogress.org, December 4, 2018.

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

U.S. Government Accountability Office. Federal Student Loans: Education Could Do More to Help Ensure Borrowers are Aware of Repayment and Forgiveness Options. GAO-15-663 (August 2016). 

"Education Corporation of America, Virginia College, and Brightwood College Turn Out the Lights": Important Advice to ECA students from Steve Rhode

By Steve Rhode (originally posted on December 5, 2018)

I just received a comment from an awesome reader that said, “Just got reports (from several campuses) that ECA has decided to close down all schools (teach out and go forward) effective immediately. Apparently, ACICS pulled their accreditation. Current employees are being let go immediately with no severance or insurance after Friday, 12/7. Don’t know all details yet as its only been a few hours and the media and news outlets have not picked up the story. I wanted to let you know since you have reported the most accurate coverage on ECA’s unraveling. It’s very sad to see ECA end like this. Many people that worked for the colleges truly cared about the students and making a difference in their life. There will be many students that will not be able to finish their education and many remaining employees that will be without a job right before Christmas. This is all so very sad.”

It does appear that ECA and Virginia College are turning out the lights. WRDW 12 in Georgia said yesterday, “A news photographer on the scene spoke with at least two people who say employees were called into a meeting this morning and told the College was being closed. Workers were reportedly told to go home and that they will not be receiving further paychecks. People we spoke to also say they were told this is occurring at locations in other states.” – Source

WTVC in Tennessee has reported similar closures in Chattanooga. – Source

Virginia College in Birmingham Alabama is reported to have closed as well. Officials at this campus are reported to have said they don’t know why this is happening. – Source

Another ECA school, Brightwood College in Texas have announced its closure as well. – Source

Inside Higher Ed is reporting, “In an email to campus employees Wednesday morning, ECA president Stu Reed said that the Department of Education had added new restrictions on its access to Title IV student aid. And on Tuesday night, the Accrediting Council for Independent Colleges and Schools suspended the colleges’ accreditation. Those steps meant the company couldn’t secure the additional capital needed to operate its campuses, he said.

The company also told employees that it would complete current course modules, which will finish in the next two weeks. A skeleton crew of employees will remain on campuses to assist students with obtaining documentation on their programs.”

The schools said they will work with students to access transcripts.

Students who owe federal student loans should immediately talk to their loan servicer regarding the process for a full discharge of their federal student loans if there is no available teach-out program offered by ECA.

By receiving a closed school loan discharge,

• you have no further obligation to repay the loan,
• you will receive reimbursement of payments made voluntarily or through forced collection, and
• the record of the loan and all repayment history associated with the loan, including any adverse history, will be deleted from your credit report.

To be eligible for a full discharge of your student loans, your loans must have been “William D. Ford Federal Direct Loan (Direct Loan) Program loans, Federal Family Education Loan (FFEL) Program loans, or Federal Perkins Loans.”

Loans most easily eligible for forgiveness are ones if:

• you were enrolled when your school closed;
• you were on an approved leave of absence when your school closed; or
• your school closed within 120 days after you withdrew.

For more information on obtaining a closed school discharge, click here.

*********

This article first appeared on Get Out of Debt Guy blog site.

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here. 

Betsy DeVos compares the student-loan program to a thunderstorm looming on the horizon

Betsy DeVos, President Trump's Secretary of Education, gave a speech a few days ago in which she candidly acknowledged that the federal student-loan program is in crisis. In fact, she compared the student loan program to a "thunderstorm loom[ing] on the horizon."

Here is what Secretary DeVos said in her speech:

• The federal government holds $1.5 trillion in outstanding student loans, one-third of all federal assets.

• Only one in four federal student-loan borrowers are paying down the principal and interest on their debt.

• Twenty percent of all federal student loans are delinquent or in default. That's seven times the delinquency rate on credit card debt.

• The debt level of individual borrowers has ballooned since 2010. Most of this growth is due to the fact that postsecondary students are borrowing substantially more money than they did just eight years ago.

• The federal government's portfolio of outstanding student loans now constitutes 10 percent of our nation's total national debt.

DeVos basically admitted that a lot of federal student loans will never be paid back. In the commercial world, she said, no bank regulator would value the government's massive portfolio of student loans at full value. And she also admitted that the Department of Education, by itself, could only make "a few, small tactical measures" to address this enormous problem.

 In my view, DeVos's speech is the most useful statement about the student-loan program coming from a federal official since the publication of A Closer Look at the Trillion, released more than five years ago by the Consumer Financial Protection Bureau's Student Loan Ombudsman, Rohit Chopra.

As I have said repeatedly, the student-loan crisis will not be resolved until the for-profit college industry is shut down and struggling debtors have access to the bankruptcy courts to discharge their student loans.

But those reforms are not politically possible right now. In the meantime, Congress should join DeVos in adopting some "small tactical measures" to ease massive suffering. Here are some suggestions:

• Congress should adopt legislation banning the federal government from garnishing the Social Security checks of elderly student-loan defaulters. As the Government Accountability Office pointed out two years ago, most of the money collected from garnishing Social Security checks goes to paying off interest and penalties and not paying down the principal on the debt.

• Disabled veterans should have their student loans forgiven automatically by the government without the necessity of making a formal application.

• The Department of Education should streamline the loan-forgiveness process for borrowers who signed up for the Public Service Loan Forgiveness Program (PSLF).  As of a few months ago, DOE had approved less than 100 of 28,000 PSLF applicants.

• Insolvent students who took out private student loans and financially distressed parents who co-signed student loans for their children or who took out  Parent PLUS loans should have free access to the bankruptcy courts.

These measures, if adopted, would do little to relieve the massive suffering caused by mountains of student loan debt. But they would be a token of good faith by our government and a sign that our political leaders finally understand that the federal student loan program is out of control and has ruined the lives of millions of Americans who took out student loans in the naive hope that a college education would lead to a better life.

References

Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013.  Accessible at: http://www.consumerfinance.gov/blog/a-closer-look-at-the-trillion/.

Betsy DeVos. Prepared Remarks by U.S. Secretary of Education Betsy DeVos to Federal Student Aid's Training Conference. November 27, 2018.

United States Government Accountability Office. Social Security Offsets: Improvement to Program Design Could Better Assist Older Student Borrowers with Obtaining Permitted Relief. Washington DC: Author, December 2016).