Wednesday, May 22, 2019

How Can I Get Out of the Student Loan I Cosigned for My Son? Advice from Steve Rhode, the Get Out of Debt Guy

If you are thinking about taking out a Parent PLUS loan to finance your child's college education or co-signing a relative's loan, you should read Steve Rhode's essay, first published at Get Out of Debt Guy, a consumer counseling web site.

Question:
Dear Steve,
It took my son 6 years to get a BA degree. By the 5th year, I ran out of money so I co-signed a private loan for him. For the past 4-5 years, I pay on this loan diligently every month because he refuses to the pay the loan or give me anything towards the payment and I don’t want to jeopardize my credit.
The original loan amt was 34K it is now only down to 29K because the interest rate keeps going up ..now it is at 7.75%. Additionally, he refuses to re-finance the loan
How can I get out from under the responsibility of his debt without jeopardizing my credit?
Sue
Answer:
Dear Sue,
Your son is being kind of a jerk. You helped him finish school and he can at least make some payment, even if he can’t pay it all each month.
Unfortunately, when you cosigned the loan you agreed to be 100% responsible for the loan. There is nothing good in cosigning if you are the one signing. My universal law of cosigning is don’t do it.
If you don’t want to ding your credit then you either need to pay the loan off in full or keep making at least the minimum monthly payment.
If you wanted to remove your liability for the debt you can do that but it will have a credit impact. Some of those options include filing bankruptcy or paying less than you owe on the balance as a settlement. However, you will need to go delinquent to settle it and the balance forgiven may be reported as a bad debt and be taxable.
The only way to make this situation different without harming your credit or costing you a big chunk of change would be to go back in time to the minute before you cosigned for him.

*******
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. 

Tuesday, May 21, 2019

Brookings Institution researcher criticizes federal student-loan program: "It is an outrage"

Last month, Adam Looney of the Brookings Institution released a paper that is chock full of ideas for fixing the federal student-loan program. Looney began his paper with a withering condemnation of the program in its present form, which he accurately described as an outrage. I am quoting his critique verbatim, just putting his words into a bullet-style format:
  • "It is an outrage that the federal government offers loans to students at low-quality institutions even when we know those schools don't boost their earnings and that those borrowers won't be able to repay their loans."
  • It is an outrage that we make parent PLUS loans to the poorest families when we know they almost surely will default and have their wages and social security benefits garnished and their tax refunds confiscated . . ."
  • "It is an outrage that we saddled several million students with loans to enroll in untested online programs, that seem to have offered no labor market value."
  • It is an outrage that our lending programs encourage schools like USC to charge $107,484 . . . for a master's degree in social work (220 percent more than the equivalent course at UCLA) in a field where the median wage is $47,980."
All these failures, Looney charges, "are entirely the result of federal government policies." 

Nevertheless, for all its faults, Looney thinks the federal student loan program is worth fixing, and he makes several interesting reform proposals:

First, Looney recommends a cap on loans to graduate students. Currently, graduate students in the Grad PLUS program can take out student loans to pay the entire cost of their studies, no matter what the cost, which is nuts. 

This "sky is the limit" loan policy has led to the escalating cost of getting an MBA or law degree. In fact, the American Bar Association estimates that the average student at a private law school takes out  $122,000 in student loans. 

Second, Looney recommends applying an "ability-to-pay" standard to parent loans or eliminating them altogether. In my view, the Parent PLUS program should be shut down. It is insane to lure parents into financing their children's college education by taking on massive student-loan debt--debt which is almost impossible to discharge in bankruptcy.

Third, Looney recommends the REPAYE program as the default student-loan repayment plan for all students. Unless a student opts out, all student-loan borrowers would be automatically enrolled in the REPAYE program when they begin repaying their student loans.

REPAYE, introduced by the Obama administration, allows student debtors to pay 10 percent of the discretionary income (income minus 150 percent of the poverty level) for 20 years rather than attempt to pay off their loans in the standard 10-year repayment plan.

In conjunction with automatic REPAY enrollment, Looney calls for voiding all fees, capitalized interest, and collection costs on current borrowers--costs and fees they wouldn't have suffered if they had been automatically enrolled in REPAYE. In addition, he proposes to cancel all student-loan debt that is 20 years old or older--without regard to the status of these loans.

Finally, Looney calls for a halt in wage and Social Security garnishment, and an end to the Treasury Offset program--the program that allows the government to capture defaulted borrowers' tax refunds.

These are all good proposals, but I have reservations. First, is it good public policy to automatically enroll all student-loan debtors in REPAYE--a 20-year income-based repayment plan? If we go that route, we will be creating a massive class of indentured servants who will be paying a percentage of their income to the government for the majority of their working lives.

Moreover, most people in those plans will never pay back the principal on their loans and could wind up with huge amounts of forgiven debt after 20 years, which would be taxable to them as income.

Secondly, Looney's proposals--all good, as I have said--are complicated, and the Department of Education has a dismal record managing just about every aspect of the student-loan program. For example, individuals enrolled in the Public Service Loan Forgiveness program have been applying for debt relief, and the Department of Education has rejected 99 percent of all claims.

So these are my revisions to Mr. Looney's proposals:
  • Amend the Bankruptcy Code to allow distressed student-loan debtors to discharge their student loans in bankruptcy like any other consumer debt.
  • Shut down the Parent PLUS program immediately, and allow parents who took out Parent PLUS loans or cosigned private loans for their children to discharge those loans in bankruptcy.
  • Finally (and this is basically Mr. Looney's proposal) wipe out all penalties, fees, and capitalized interest for all 45 million student-loan borrowers and stop garnishing wages, tax refunds, and Social Security checks of student debtors in default.
My proposals, Mr. Looney's proposals, and for that matter, Senator Warren's debt-forgiveness proposal are shockingly expensive. Any policy that grants student-loan forgiveness to the millions of people who deserve it will cost billions--a quarter of a trillion dollars perhaps or even more.

But let's face facts. Millions of student borrowers are not paying back their loans under the present system. Indeed, Secretary of Education Betsy DeVos acknowledged last November that only one debtor out of four is paying down principal and interest on student loans.

Let's admit that the student-loan program is a catastrophe, grant relief to its victims, and design a system of higher education that is not so hideously expensive.

Image credit: Quora.com


References

Adam Looney. A better way to provide relief to student loan borrowers. Brookings Institution, April 30, 2019.






Saturday, May 11, 2019

Education Secretary Betsy Devos Hires Private Accounting Firm to Audit the Student Loan program: Asking For Bad News

Secretary of Education Betsy Devos hired McKinsey & Company, a global consulting firm, to audit the federal student loan program. Why did she do that?

After all, the Congressional Budget Office, the Government Accountability Office or the Inspector General could have done the job. Why hire a private firm?

I'm thinking Secretary DeVos and the Trump administration realize the federal student-loan program is under water. They know the news is bad, but they want to know just how bad it is. After all, Secretary DeVos compared the program to a looming thunderstorm in a speech she made last November.

It took 42 years, DeVos pointed out, for the federal student-loan portfolio to reach half a trillion dollars (1965 until 2007). It took only 6 years--2007 to 2013--for the portfolio to reach $1 trillion. And in 2018--just five years later--the federal government held $1.5 trillion in outstanding student loans. In fact, uncollateralized student loans now make up 30 percent of all federal assets.

This wouldn't be a problem if student borrowers were paying off their loans. But they're not. As DeVos candidly admitted last November, "only 24 percent of FSA borrowers—one in four—are currently paying down both principal and interest." One in five borrowers are in delinquency or default, and 43 percent of all loans are "in distress" (whatever that means).

Although DeVos did not say so explicitly, she basically acknowledged that we've arrived where we are because the government is cooking the books. Student loans now constitute one third of the federal balance sheet. "Only through government accounting is this student loan portfolio counted as anything but an asset embedded with significant risk" DeVos said. "In the commercial world, no bank regulator would allow this portfolio to be valued at full, face value."

We can hope that McKinsey and Company will give us an accurate accounting. But we already know the news will be catastrophic.  More than 7.4 million people are in income-based repayment plans (IBRPs) that stretch out for 20 and even 25 years. IBRP participants make loan payments based on their income, not the amount they borrowed. Virtually no one in these plans will ever pay off their loans. 

Millions more have their loans in deferment or are prolonging their education to postpone the day they will be obligated to start making loan payments. Thus--as DeVos disclosed--only a quarter of student-loan borrowers are paying back both principal and interest on their loans.

Over the past 15 years or so, presidential administrations have juggled the numbers to postpone the day of reckoning. "After us, the deluge," has been the watchword.  Meanwhile, university presidents are saying nothing about this looming thunderstorm. They hope the deluge won't come until they are drawing their pensions.

The McKinsey report, when it comes, will be a shock to the public consciousness. And there is only one solution. We must admit that the federal student-loan program is totally out of control and allow its victims to discharge their loans in bankruptcy.

Before the deluge: Photo Credit Yale Center for British Art

References

Michelle Hackman, Josh Mitchell, & Lalita Clozel. Trump Administration Hires McKinsey to Evaluate Student-Loan Portfolio. Wall Street Journal, May 1, 2019.

Tuesday, May 7, 2019

A Kansas bankruptcy judge grants Vicky Jo Metz a partial discharge of her student loans, and she wins her appeal

Vicky Jo Metz borrowed $16,613 back in the 1990s to attend a community college, but she never got a degree. Over the years, she filed for bankruptcy three times, but she continued making payments on her student loans under court-approved repayment plans. In fact, she paid almost 90 percent of what she originally borrowed.

Nevertheless, Metz's student-loan debt kept growing due to accruing interest. By 2018, her total debt had grown to $67,277--four times what she borrowed. 

In 2017, Metz commenced an adversary proceeding in a Kansas bankruptcy court, seeking to discharge her student loans. Her creditor, Educational Credit Management Corporation (ECMC), objected to a discharge. Put Metz in an income-based repayment plan (IBRP), ECMC demanded. 

But Bankruptcy Judge Robert Nugent disagreed. Metz, who was 59 years old, would never pay off her student loans under an IBRP, Judge Nugent reasoned. On the contrary, if Metz entered a 25-year IBRP and faithfully made her income-based monthly payments, her debt would continue to grow due to accruing interest. By the time Metz completed her repayment plan, she would owe $157,277—nine times what she borrowed! Although her student-loan debt would be forgiven after 25 years of making payments, Metz would face significant tax liability because the IRS considers forgiven debt as taxable income.

 Judge Nugent granted Metz a partial discharge of her student loans. He canceled all the accrued interest on her student debt but required her to pay the original $16,613.

ECMC appealed Judge Nugent's decision to a federal district court, and Judge John Broomes upheld Judge Nugent's ruling. Like Judge Nugent, Judge Broomes applied the three-part Brunner test to determine whether it would be an undue hardship for Metz to repay her student loans.

In Judge Broomes' view, Metz could not repay her student loans and maintain a minimal standard of living. Thus, she met part one of the Brunner test. Moreover, she met part two of Brunner because her financial situation was not likely to change. Finally, in Judge Broomes’ view, Metz met part three of the Brunner test because she had handled her student loans in good faith.

In its appellant’s brief, ECMC renewed its argument that Metz should be placed in an IBRP and downplayed the tax consequences of such a plan. Metz would probably suffer no tax consequences from an IBRP, ECMC argued, because she would likely be flat broke when her IBRP concluded.  Under current law, ECMC pointed out, individuals pay no federal tax on forgiven debt if they are insolvent at the time the debt is forgiven.

In a footnote, Judge Broome pointed out the absurdity of ECMC’s position. “The import of that argument,” Judge Broome wrote, “is that under ECMC’s plan, [Metz] will be kept insolvent, if not entirely impoverished, until she is eighty years old and the debt is forgiven—what a pleasant system.”

Judge Broomes’ Metz decision is the second appellate court decision out of Kansas to uphold a bankruptcy court’s partial discharge of student-loan debt. The first decision, Murray v. ECMC, granted a partial discharge to Alan and Catherine Murray, a married couple in their late forties, whose student-loan debt had quadrupled over 20 years due to accruing interest.

Together, Metz and Murray stand for the proposition that long-term, income-based repayment plans are not appropriate for insolvent student-loan debtors when it is clear that debtors in these plans will never pay off their loans. Had ECMC had its way with Vicky Jo Metz, she would have made monthly student-loan payments for a quarter of a century—until she was in her eighties.  At that point, she would face a huge tax bill for $150,000 in forgiven debt or she would be insolvent. As Judge Broome remarked: What a pleasant system.



References

Educational Credit Management Corporation v. Metz, Case No. 18-1281-JWB (D. Kan. May 2, 2019).

In re Murray, 563 B.R. 52 (Bankr. D. Kan 2016); aff’d sub nom. Educational Credit Management Corporation v. Murray, No 16-2838, 2017 WL 4222980 (D. Kan. Sept. 22, 2017).

Tuesday, April 30, 2019

Senator Elizabeth's Student-Loan Forgiveness Plan Isn't Radical: The Feds are Already Forgiving Billions of Dollars in Student Debt

Adam Levitin, writing for Credit Slip, made a profound observation about Senator Elizabeth Warren's proposal to forgive massive amounts of student-loan debt.  Her harsh critics, Levitin, writes, moan and grown about the morality of contracts, the unfairness of allowing some student borrowers to escape their legal obligations, and the enormous cost of forgiving billions of dollars of accumulated student-loan debt.

In Levitin's view, these critics are only demonstrating that they don't know anything about how the federal student-loan program works. If they did, Levitin explains, they would know that "we crossed the debt forgiveness Rubicon long, long ago." In fact, enormous debt forgiveness is already "baked into the federal student loan program."

Levitin is absolutely right. Far less than half of student borrowers who have entered into repayment are paying down the principal of their loans. Millions of student-loan debtors have their loans in deferment, which means they aren't paying anything on their debt. Another 7.5 million borrowers are in income-based repayment plans (IBRPs) with their repayment schedules set so low that their monthly payments don't even cover accruing interest on their loan balances.

And then we have the Public Service Loan Forgiveness Program (PSLF), which allows qualified public-service workers to make income-based payments for 10 years, after which their loan balances are forgiven. How many people are in the PSLF  program (or think they are in it)? We don't really know, but well over a million student borrowers have applied to become PSLF eligible.

Even Betsy DeVos, Trump's Secretary of Education, publicly admitted that the student loan program is a mess. As DeVos revealed last November, only one borrower out of four are paying down both principal and interest on their student-loan debt.  Almost one out of five borrowers are delinquent on their loans or in default. And 43 percent of student loans, by DeVos's calculation, are currently "in distress."

As Mr. Levitin succinctly put it:
The only real difference between Senator Warren's proposal and the existing forgiveness  feature in the student loan program is whether the forgiveness comes in a fell swoop or is dribbled out over time. Given the federal government's infinite time horizon, the difference is really just an accounting matter. 
In other words, to baldly state the point, millions of student-loan debtors aren't paying back their loans and never will. Probably half of the $1.56 trillion in outstanding student loans will never be paid back.

Levitin argues that all student borrowers should be enrolled in income-based repayment plans by default when they finish their studies.  But I disagree. Putting every college graduate into a 20- or 25-year repayment plan is basically making these degree recipients indentured servants for the government--bound to pay a percentage of their wages to the Department of Education for a majority of their working lives.  If we do that, we will have basically created a permanent underclass of 21st century sharecroppers.

Moreover, as Levitin correctly points out, there is an enormous psychological benefit to Senator Warren's plan, which grants immediate debt forgiveness rather than dribbling it over over two decades or more in income-based repayment plans. "Consumers feel weighed down by the stock of their debt, even if they won't actually have to repay a large chunk of it." Indeed, it is well established that student-loan debt is preventing Americans from buying homes, having children, or saving for their retirement.

And then there is a rarely discussed problem with  the current debt-forgiveness system: tax liability. People whose loans are forgiven after a quarter century of making income-based payments will get tax bills for the amount of their forgiven debt because the IRS considers forgiven loans as taxable income.  Of course that problem could be easily fixed if Congress would enact legislation making forgiven student-loan debt nontaxable.

But Congress hasn't done that. Why? Because our politicians want to pretend that the federal student loan program isn't broken. It's like that old explanation of the Russian economy during the days of the Soviet Union. "The government pretends to pay us," a proletarian explained, "and we pretend to work."


Student-loan debtors: The new sharecroppers



Wednesday, April 24, 2019

Senator Elizabeth Warren's Proposal to Cancel Student Debt: A Great Idea (Just Needs a Little Tweaking)

Earlier this week, Senator Elizabeth Warren astonished the higher education community (and me in particular) by announcing three bold proposals: 1) free undergraduate education at public universities; 2) massive student-loan forgiveness, and 3) a ban on federal funding for for-profit colleges.

Student-loan debtors all over America should stand up and applaud Senator Warren. She is the first national political figure to call for an end to federal aid for the for-profit colleges. This sleazy racket gets about 90 percent of its revenues from federal student-aid money. If Congress shut off that spigot as Warren proposes, most of them would close in less than 30 days.

The for-profit college industry, with its armies of lawyers and lobbyists, has Congress in its back pocket. They surely understand that Senator Warren's proposal is an existential threat. Watch how this sleazy racket starts shifting resources to sabotage Warren's presidential bid.

On the other hand, Warren's call for free college education is not original. Senator Bernie Sanders promised free college during his 2016 presidential run and Senator Kamala Harris has put free college on her campaign platform. Nevertheless, it's a good idea.

It's Warren's third proposal, however, that is the real stunner. She's calling for massive student-loan debt forgiveness for 95 percent of student borrowers.

Senator Warren's student-loan forgiveness plan is a little complicated and has some limitations. she wants to forgive up to $50,000 in student-loan debt but would reduce this benefit for high-income families.  But her basic idea is sound. Why?

First of all, millions of Americans will never pay back their student loans whether Warren's proposal is implemented or not, so we might as well forgive the debt. Almost 8 million people are in income-based repayment plans (IBRPs) that allow them to make monthly payments based on their income and not how much they owe.  For most of these people (almost all of them actually), their loan payments are so small that they don't cover accruing interest.  For people in IBRPs, their debt grows larger each month as interest accrues. They will never pay back the amount they borrowed.

Several million more student-loan borrowers have their loans in deferment while the interest accrues and capitalizes on their original debt. Most of those folks will never repay their loans.

Finally, there is a good argument that forgiving all this student debt--$1.56 trillion--would boost the economy. Unburdened by debt they will never repay, millions of Americans will be able to rejoin the middle class--buy houses and cars, have children, save for retirement.  Indeed, a study by researchers at Bard College's Levy Institute makes that very argument.

Conservatives recoiled in horror at Warren's proposal to forgive student debt, spewing a lot of blather about the sacred nature of contract obligations, the unfairness to people who paid off their student loans, etc.

But in my view, Warren's student-loan forgiveness proposal does not go far enough. Millions of student-loan debtors are entitled to student-loan forgiveness with no $50,000 cap. And millions of parents have co-signed student loans or taken out Parent PLUS loans, and they also are entitled to relief.

So I propose a few tweaks to Senator Warren's brave proposal:

First, all Parent Plus loans should be forgiven immediately for any family with household income under $200,000. And all parents and relatives who cosigned private student loans should be relieved of any legal obligation to repay that debt.

Secondly, instead of instituting a loan-forgiveness plan, I propose that distressed student-debtors be allowed to discharge their student loans in bankruptcy as proposed in Representative John Katko's recently filed bill. People who took out student loans to go to law school and then got rich as corporate lawyers should pay back their loans. But people who otherwise qualify for bankruptcy relief should be able to discharge their student loans like any other consumer debt.

But let's not quibble about the details. Senator Warren's call for free college and student-loan forgiveness are basically good ideas. And her call for shutting off federal aid to the for-profit colleges is stunningly brave.

In my view, it is time to stop heckling Senator Warren about Cherokee-Gate. She is a serious presidential candidate who has made bold and thoughtful policy proposals. Americans should listen to what she has to say about the student-loan crisis because--let's face reality--a lot of student-loan debt will never be paid back.

References

Elizabeth Warren. I'm calling for something truly transformational: Universal free public college and cancellation of student loan debt. Medium, April 22, 2019.

Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum. The Macroeconomic Effects of Student Debt Cancellation. Levy Economics Institute of Bard College, February 2018.

Saturday, April 20, 2019

Dicent v. Kaplan University: An unhappy student sues a for-profit university, but the Third Circuit forces her to arbitrate her claims

Maria Dicent enrolled in an online legal studies program at Kaplan University in 2014. She did not have a good experience. In 2017, she sued Kaplan in a federal court, accusing the for-profit university of making false claims and disseminating false advertisements.

According to Ms. Dicent, Kaplan lured her into enrolling in Kaplan's online program by using deceptive tactics. She said she had not been informed that she would need 180 hours to graduate, far more hours than a typical four-year degree program requires and that she had not been able to keep her eBooks, which she apparently paid to use. She also said Kaplan's financial aid office retaliated against her because she refused to allow her photo to be used to promote Kaplan.

Unfortunately for Ms. Dicent. she signed an arbitration agreement when she enrolled at Kaplan back in 2014. In that agreement, Dicent promised not to sue Kaplan and to arbitrate any claims she might have against the for-profit. She also agreed to waive her right to a jury trial.

Based on the arbitration agreement, a federal trial court threw out Dicent's suit and ordered her to arbitrate her clam. Dicent, who pursued her case without a lawyer, then appealed to the Third Circuit Court of Appeals, which sided with the trial court.

Dicent argued on appeal that she was not aware of the arbitration agreement, but the Third Circuit did not buy her argument. A clearly labeled Arbitration Agreement was included in Dicent's enrollment packet, the court noted; and Dicent admitted having signed the packet with an e-signature.

Dicent v. Kaplan University is an unfortunate decision. The Obama administration recognized that for-profit colleges were using arbitration agreements to prevent students from suing them for fraud or other misconduct. Obama's Department of Education adopted a regulation forbidding the for-profits from forcing their students to sign arbitration agreements.

 Betsy DeVos, President Trump's Secretary of Education, scuttled the Obama ruled shortly after taking office, but a federal court ordered her to implement it. In light of that ruling, Secretary DeVos released new guidance to the for-profit colleges, instructing them to drop enforcement of mandatory arbitration agreements.

In recent years, a few courts have invalidated arbitration agreements on various grounds. Some courts have labeled them adhesion contracts--agreements which a stronger party forces a weaker party to sign on unfavorable terms. Other courts have looked at the inherent unfairness in some of these agreements. For example, a California court refused to enforce an arbitration agreement that required California students to arbitrate their disputes against a medical-training school in Indiana.

Poor Ms. Dicent. Acting without an attorney, she was probably unaware of the legal arguments that can be made against arbitration agreements that for-profit colleges require students to sign as a condition of enrollment. She may not have known that the Obama administration recognized these agreements for what they are--a shyster tactic to protect for-profit colleges from being sued for fraud.

I feel quite certain that Ms. Dicent was telling the truth when she said she did not know about the mandatory arbitration agreement until Kaplan submitted it in district court. Almost all students sign long, turgid documents as a condition of enrollment, and most of them sign without reading. What would be the point? When students enroll at a for-profit college, they are enrolling on the college's terms, and they realize they have no power to negotiate.

What is so bad about arbitration agreements? First of all, the complaining party is usually required to pay half the arbitrator's fees, so arbitration may be more expensive for the student than a lawsuit. Second, arbitration agreements often bar students from banding together to file class actions suits, which is virtually the only way students can obtain justice against the well-funded for-profits with their battalions of lawyers.

Finally, it is well known that arbitration generally favors the corporate party. That is why banks, financial-services institutions, and for-profit colleges force their customers to sign them. The arbitrators know they will see a defrauded student only once, but they will see the corporate party again and again. If they get a reputation for siding with the underdog, the corporations won't choose them to arbitrate their disputes.

The for-profits know they will repeatedly be accused of defrauding their students. The best way to deal with this constant threat is to get the students to promise not to sue before allowing them to enroll. Then when students get defrauded--as many of them will--there will be damn little they can do about it.


References

Dicent v. Kaplan University, Civil Action No. 3:17-cv-01488 (M.D. Pa. June 15, 2018), aff,d No-18-2982 (3d Cir. Jan. 3, 2019).

Dicent v. Kaplan University, WL 158083, No-18-2982 (3d Cir. Jan. 3, 2019) (unpublished opinion).

Kreighbaum, Andrew (2019, March 18).  DeVos Tells Colleges to Drop Arbitration Agreements, Inside Higher Ed.