Student Debt Only Went Up 2 Percent Last Year! (Is This a Good News-Bad News Joke?)

An airline pilot, flying a transoceanic route, made an announcement over the intercom to the passengers. "I have some good news and bad news," he said.

"First, the bad news. One engine is on fire, we're low on fuel, and we have no idea where we are." But on the bright side, he continued, "We're making great time!"

The Institute for College Access and Success issued a report this week that strikes me as a good news-bad news joke. Student debt levels for the graduating class of 2018 was $29,200, only 2 percent more than the previous year. I suppose that's good news.

But the bad news is this: About 45 million Americans are student-loan debtors, and collectively they owe $1.6 trillion in student debt. According to TICAS, over 20 percent of African Americans will default on their student loans within 12 years of entering college, 7 times the rate for whites (p, 9).

Among students who began their studies at for-profit colleges, TICAS reported, 30 percent will default within 12 years of entering college, seven times the default rate for students who first enrolled at public institutions.

These dismal outcomes are happening during a nationwide enrollment decline, which is hitting the nonprofit private schools the hardest. The small liberal arts colleges are frantically trying to keep enrollments up. They've slashed tuition by an average of 50 percent. They've started new academic programs. They're cutting faculty lines, particularly in the humanities. They've hired marketing firms, and have tried re-branding themselves with billboards and hip slogans.

But for many liberal arts schools, these strategies will not keep them afloat. And this reminds me of another story.

A Texas rancher told a friend he had begun an experiment to lower his livestock feed bills.  "I began feeding my horse a little less hay everyday," he confided, "until I finally weaned him off hay altogether.

"How did that work out for you?, his friend asked.

"It was working great," the rancher said. "But unfortunately, my horse died before I was able to complete the experiment."

The experiment was a success, but the horse died.
Photo credit: DelawareOhioNews.com

The enrollment crash is an existential threat to liberal arts colleges: Bucknell VP Bill Conley's insightful essay

Bill Conley, Vice President for Enrollment Management at Bucknell University, wrote a perceptive essay for Chronicle of Higher Education about the "Great Enrollment Crash" at liberal arts colleges. There has been a huge downturn in undergraduate education at liberal arts colleges, and no turnaround is in sight. As Conley put it:

Higher education has fully entered into a new structural reality. You'd be naïve to believe that most colleges will be able to ride out this unexpected wave [ declining enrollment] as we have the previous swells.

What's going on?

First, as Conley explains, the demographics are bad. Americans are having fewer children. In fact, the birth rate has fallen below replacement levels in the U.S., just as it has in Europe. There are fewer high school graduates who want to go to college.

Secondly, the demand for a liberal arts education has plummeted. As Conley reports, degrees in the humanities dropped from 17 percent of all degrees in 1967 to just 5 percent in 2015.

Moreover, the current crop of college students is more focused than past generations on getting a college degree that will lead to a good job. More and more students are choosing to major in business, biology, or economics, while philosophy majors are becoming an endangered species.

The liberal arts colleges have responded to this threat by slashing tuition prices for incoming first-year students. On average,  the colleges are only collecting half their posted tuition rates. Colleges hoped to attract more students by lowering tuition, but that strategy hasn't worked for many of them.

Of course, the liberal arts colleges aren't the only sector of higher education facing enrollment declines. As Conley pointed out, the Pennsylvania System of Higher Education has seen its public institutions lose 20 percent of their enrollments in less than 10 years.

Increasingly, families are looking to more affordable public universities for their children's college education and eschewing the small, private liberal arts schools. The obscure, non-elite liberal arts colleges are suffering the most, and several have closed in recent years.

"I don't see these trends changing," Conley wrote, "especially when coupled with stagnating income and the resulting pressure on a family's return-on-investment calculus." In short, he summarized, "Disruption is here to stay."

I agree with Mr. Conley's forthright assessment of liberal arts education; and personally, I think it is doomed. Liberal arts colleges were founded to educate students in the humanities, literature, history, and philosophy; but few students appreciate those fields of study. Furthermore, the liberal arts have been balkanized, as faculty obsess on race, class, gender, and sexual orientation so that there is no longer even a broad consensus about what constitutes a liberal arts education.

In my view, I think the small, liberal arts colleges should prepare for a dignified death because they are going to die anyway. They need to develop contingency plans for placing their students in other institutions when they close and they need to make the best provision they can for laid-off faculty members--many of whom will be unable to find new jobs. After all, what university wants to hire a middle-aged philosophy professor?

This is a sad turn of events, and I do not think the liberal arts colleges brought this calamity on themselves. Rather they are like the blacksmiths of the early twentieth century, who were put out of work by Henry Ford's cars.

I don't have a solution to this existential crisis among the small, private schools. But I have some advice for students who are choosing a college. Don't enroll at an expensive, obscure, private college. Get your degree from a reputable public institution.

And if you are a newly minted Ph.D. looking for your first academic job, don't go to work at a small liberal-arts college. Even if you get tenure at some out-of-the-way little school in New England or the Midwest, that won't keep you from being laid off. And once you lose that tenured job at a college that was closed, you will find it damned hard to get another one.

Higher education leaders oppose Democrats' proposal for free college: Why?

College tuition has risen faster than the rate of inflation for the past quarter-century. While wages have remained stagnant, the cost of going to college has shot through the roof. According to Forbes writer Camilo Maldonado, tuition rose 8 times faster than wage growth during the years 1989 to 2016. Eight times faster!

Why? The colleges say they are forced to raise tuition rates because the states are providing less support for higher education. But this lame explanation--repeated ad nauseam--is mostly bullshit. The colleges don't mention the explosion in administrative positions-the profusion of assistant vice presidents, executive associate deans, etc. It is not uncommon for senior administrators at public and private universities to draw salaries that exceed a quarter-million dollars a year.

In any event, everyone agrees that rising tuition costs have forced millions of American students to take out student loans, which now total $1.6 trillion. Something must be done to alleviate the distress.

Several Democratic candidates for the presidency have proposed making college education free at all public colleges and universities. You would think the higher education community would love that idea. But it doesn't. Vassar president Catharine Hill criticized Bernie Sanders's free-college idea when he ran for president in 2016. Her lame-brained solution was to expand long-term income-based repayment plans. And that's basically what we've done--creating repayment plans deliberately structured so that students can never pay off their college loans.

Now we are in the early stages of the 2020 presidential election season, and more Democratic hopefuls have joined Bernie in proposing a free college education for everyone. Senators  Elizabeth Warren, Kamala Harris, Cory Booker, and Kirsten Gillibrand (who recently dropped out of the presidential race) have all endorsed a free-college proposal.

But the higher education community still opposes the idea. Just a few days ago, Brian Rosenberg, president of Macalester College, published an op-ed essay in Chronicle of Higher Education, in which he cited a couple of liberal tropes to justify his opposition to free college.

A free college education would hurt low-income students, Rosenberg argues, because they would be "squeezed out" in the application process that would become more competitive if tuition were free. And he also contends that free college would exacerbate the nation's already low graduation rate.

Huh? How could free college be bad for low-income students? How could it make graduation rates go down?

Mr. Rosenberg is the president of Macalester College, a very good liberal-arts school in Minnesota, but he does not mention that free college at public institutions would severely disadvantage the private colleges. Who would pay $54,000 a year in tuition and fees to attend Macalester College if they could enroll at the University of Minnesota tuition-free?

 I'm sure Mr. Rosenberg's arguments against free college are sincere and his commitment to private liberal-arts education is genuine. But a great many university presidents and higher-education policy wonks simply don't care about the student-loan crisis, which has motivated political leaders to propose a free college education.  They want to preserve the status quo in higher education, with the federal government spewing more than a $100 billion a year to support the present system.

How many elite-college presidents have come out in favor of a free college education? I don't think any of them have. Unlike Mr. Rosenberg, most college leaders are keeping silent about their qualms, but rest assured they will fight tooth and nail if a Democrat is elected President and tries to get a free-college plan through Congress.

Meanwhile, I don't think any of these arrogant college presidents have lifted a finger to ease the student-debt crisis.  The status quo works just fine for them.

Macalester College: $54,000 in tuition and fees
(the bagpipe music is complimentary)

Overbuilt "luxury" student housing: Speculators are turning university towns into slums

The Commercial Observer ran a story a few days ago about a financial crisis in the so-called luxury student-housing market. As reported by Matt Grossman, the default rate in this niche of the securitized real-estate market has gone up dramatically in recent years and now stands at15.3 percent. That's 60 percent higher than the default rate just eight months ago when it was 9 percent.

Luxury student-housing became a hot new investment sector a few years ago. Speculators built thousands of student-housing units in college towns all over the United States.  These units included features to attract college students--swimming pools, basketball courts, tanning beds, and fitness centers. Rents were high--over $1,000 a month. But parents often co-signed the leases, and many students paid their rent with student-loan money.

After the new complexes were rented up and began showing positive cash flow, the speculators packaged them into mortgage-backed securities and sold them to investment pools--pension funds, hedge funds, and other institutional investors.

But the speculators built too many luxury student apartments. College students--a notoriously fickle bunch--tended to move out of older units to take up residence in swankier new digs. Vacancy rates spiked upward in the older buildings, the new owners found themselves unable to service their mortgages, and now many of these so-called luxury apartment buildings are going into default.

How did this happen? First, as I have said, these luxury apartments were overbuilt by speculators; and the speculators simply did not care. They had no local ties to the college towns. Their plan was to sell the units quickly while they were still new, take their profits, and move on to the next investment.

Moreover, most of this so-called luxury student housing is not luxury housing at all. It's just new housing. If you go inside one of these apartments, you will likely find plastic interior doors, cabinets made out of particle board rather than wood, and cheap appliances and amenities.

And now--in the space of just a few years--universities all over America are ringed by aging apartment complexes, many of which have gone into default. As the buildings decay, rents are slashed, maintenance is deferred, and before long these so-called luxury apartment buildings become slums.

I see this tragedy unfolding in my own neighborhood, where thousands of apartment buildings have been thrown up in the flood plain near Louisiana State University. But you can see this phenomenon in almost any town with a major university.

Everybody knows that the federal student-loan program has created millions of paupers, people who have amassed so much student debt that they will never pay it off. Even Education Secretary Betsy DeVos has acknowledged this calamity.

But the federal student-loan program has also contributed to an environmental crisis--the emergence of slum housing around America's colleges and universities. The glut in student housing is at least partly attributable to the federal student loan program, which allowed students to rent luxury apartments with borrowed money

 If you want to see an example of this crisis, drive through the Tigerland neighborhood, a jumble of old apartment buildings originally built for students near LSU in Baton Rouge.

Parts of Tigerland are now a serious slum where you would not want to live if you were a college student.  And not far away, new apartments are still being built--Tigerlands in the making in just a few years.

Wall Street Journal decries "The Great Student-Loan Scam": But the flimflam is even worse than WSJ describes

Last month, the Wall Street Journal published an editorial titled "The Great Student-Loan Scam," in which the newspaper excoriated the Obama administration for the way it handled the federal student loan program. According to WSJ, Democrats "nationalized" the student-loan market in 2010 to help pay for Obamacare.  Eliminating private lenders, Democrats said, would save taxpayers money.

Indeed, the Congressional Budget Office treated the federal student-loan program as a profit center during the Obama years by projecting that it would actually make money. Remember when Senator Elizabeth Warren accused the program of raking in "obscene" profits?

But of course, the student-loan program is not a profit center. It's been bleeding red ink for years.  The Obama administration's generous income-based repayment plans (PAYE and REPAYE) were touted as compassionate programs to relieve overburdened student borrowers and keep them out of default. But the plans were structured so that most borrowers aren't paying down the principal of their loans.

As one Obama-era advisor recently admitted, "There will be substantial amounts of student debt that will never be repaid." Oh, yeah. Most of it will never be repaid.

In fact, the student-loan crisis is worse than the Wall Street Journal characterized it. A Brookings Institution report, issued several years ago, projected that almost half of all student loans taken out to attend for-profit colleges would be in default within five years after entering repayment.

Education Secretary Betsy DeVos, of all people, candidly acknowledged how bad the situation is last November.  "[O]nly 24 percent of FSA borrowers--one in four--are currently paying down both principal and interest," DeVos said in a speech. Almost 20 percent of borrowers are delinquent on their loans or in default. And, by DeVos's calculations, 43 percent of all outstanding loans "are in distress" (whatever that means).

 Unfortunately, although DeVos is honest about the scope of the student-loan crisis, she is doing all the wrong things. DeVos's DOE bungled the Public Service Loan Forgiveness program, rejecting 99 percent of the initial applications for debt relief. And just a few days ago, the Education Department issued new regulations that make it more difficult for student borrowers to bring fraud claims against for-profit colleges.

In short, the Wall Street Journal accurately labeled the federal student-loan program as "the great student-loan scam." But the program is much worse than that. About 45 million Americans hold a combined total of $1.6 trillion in federal student loans, and at least half of those people will carry their student-loan debt to their graves. Yes, the federal student-loan program is more than a giant scam, it's a national catastrophe.

“A noose around her economic neck”: A young lawyer wins a partial discharge of her private student loans

Nitcher v. National Collegiate Student Loan Trust, decided a few days ago, is another story of a heavily indebted lawyer who attempted to have her student loans discharged in bankruptcy. 

Leslie Taiko Nitcher is a 38-year-old attorney who graduated from Willamette University School of Law and passed the Oregon State Bar in 2008. She found it difficult to find steady work, but she finally landed a law job that paid her $69,000 in 2018.

Nitcher took out federal student loans and private student loans while she was in school. Although she made some payments on her student-loan debt, she owed a quarter of a million dollars on her loans ten years after she graduated. About $200,000 of that debt consisted of federal student loans, which she managed by enrolling in an income-based repayment plan (REPAYE). She pays $479 a month under that plan, which obligates her to make monthly payments for 25 years.

Nitcher also owed $51,000 in private student loans and she attempted to discharge these loans in bankruptcy. Bankruptcy Judge Peter C. McKittrick was sympathetic to her plight and granted Nitcher a partial discharge that requires her to pay only $16,500 on that debt, payable in 110 monthly payments.

Here is how Judge McKittrick began his opinion :

This adversary proceeding tells a far too common story of the plight of a professional swallowed by massive student loan debt, much of which she has no hope of repaying during her lifetime. In 2005, when Leslie Nitcher . . . enrolled in law school, it was with the hope and expectation her advanced degree would lead to a legal career at a level of compensation commensurate with the standard of living that lawyers historically have enjoyed. Instead, she faced a bleak job market when she graduated from law school in 2008. 

The question before the court, Judge McKittrick wrote, was "to what extent her student loan debt will remain a noose around her economic neck for the remainder of her economically productive years."

Judge McKittrick finished his opinion by explaining why he ruled as he did. "The reason I have concluded that the Student Loans should be discharged is largely because Nitcher cannot survive if [her private-loan creditor] garnishes her wages." 

The Nitcher decision is important because it is one of a growing number of bankruptcy-court decisions in which judges acknowledge the heavy burden that many law graduates face due to the tremendous amount of student-loan debt they accumulate during their studies. In many instances, they simply cannot pay it back.

As Judge McKittrick put the matter, Nitcher had “a noose around her economic neck." Unfortunately, Nitcher is still obligated to make monthly payments of $479 a month under REPAYE, which will not terminate until she is in her 60s. Thus, Judge McKittrick loosened the noose around Ms. Nitcher's neck, but she will continue standing on the scaffold for the next quarter of a century.

References

Nitcher v. National Collegiate Student Loan Trust, Bankr. Casse No. 18-31729-pem7 (August 23, 2019).

A disbarred lawyer is unable to discharge $250,000 in student loans in bankruptcy. Will he ever pay back those loans?

Paul Hurley obtained a law degree in 2004 and a master's degree in tax law in 2006. He took out student loans to fund his studies, and he was never in default on those loans.

About three years after getting his master's degree, Hurley took a job as a revenue agent for the Internal Revenue Service, which required him to audit taxpayers' federal tax returns. According to court documents, Hurley solicited a $20,000 bribe from a taxpayer in 2015, and he was convicted of two felonies: Receiving a bribe by a public official and receiving a gratuity by a public official. He was sentenced to 30 months in prison, and he lost his license to practice law in the state of Washington (601 B.R. at 532).

While still incarcerated, Hurley filed for bankruptcy and sought to discharge $256,000 in student loans. He was 45 years old at the time and had a three-year-old son. Hurley argued that it would be an undue hardship for him to pay back his student loans, given the fact that he could no longer practice law.

A bankruptcy court in the state of Washington denied Hurley's petition to discharge his student loans. In the court's opinion, Hurley failed the three-part Brunner test for determining whether repayment of his loans would constitute an undue hardship. 

In particular, the court ruled that Hurley failed the good faith prong of the Brunner test. In the court's view, Hurley's criminal conduct was "very significant' and outweighed his earlier, good-faith efforts to repay his student loans.

“As a lawyer,” the bankruptcy judge reasoned, “[Hurley] had to know that, if he committed the crime that he did, he would lose his ability to practice law. As such [Hurley] suffers from both failure to maximize his income and having willfully or negligently caused his financial condition” (601 B.R. at 533, appellate court quoting the bankruptcy court).

Hurley appealed the bankruptcy court’s decision to the Ninth Circuit Bankruptcy Appellate Panel, which affirmed the lower court’s opinion. The BAP court emphasized that it was not endorsing a bright-line rule that a criminal conviction always nullifies good faith. Nevertheless, the appellate court agreed with the bankruptcy judge that Hurley’s “willful criminal behavior tipped the balance against good faith”(601 B.R. at 536).

In addition, the BAP court agreed with the lower court that Hurley failed to maximize his income, which is a requirement for obtaining a student-loan discharge. Hurley maintained that he could not maximize his income because he lost his law license, but the BAP court pointed out that he lost his license “because of his willful conduct.”

Paul Hurley is not the most sympathetic person to seek student-loan relief in a bankruptcy court.  The BAP court and the bankruptcy court are clearly correct in concluding that Hurley’s financial predicament is the result of his own misbehavior.

But what did the BAP court accomplish when it ruled against Mr. Hurley? Will Hurley ever pay back the quarter of a million dollars he owes in student loans? No—I don’t think he will.

Hurley’s only hope now is to apply for an income-based repayment plan that will set his monthly loan payments based on his income. Such a plan will terminate in 20 or 25 years—when Hurley will be in his sixties. It seems virtually certain that his loan balance will keep growing with each passing month because interest will continue to accrue on his debt even if he makes his regular monthly loan payments.

Senator Bernie Sanders proposes student-loan forgiveness for everybody—even Mr. Hurley. That may be going a bit far.

But people who are insolvent and unable to repay their student loans should be able to discharge those loans in bankruptcy like any other unsecured debt--even people who've made mistakes.

After all, what is the point of saddling Mr. Hurley with crushing student-loan debt he will never repay?

References

Hurley v. United States, 601 B.R. 529 (B.A.P. 9th Cir. 2019).