Lozada v. ECMC: Bankruptcy court is not required to consider a student-loan debtor's religious giving in its "undue hardship" analysis

In 2017, Rafael Lozada, age 67, filed an adversary proceeding in a New York bankruptcy court, seeking to discharge more than one-third of a million dollars in student-loan debt. Lozada acquired part of this debt for his own education expenses and part from a Parent Plus loan he took out to pay for his son's education. Lozada's debt accrued interest at an annual rate of 8.25 percent--about $27,000 a year.

Bankruptcy Judge Mary Kay Vyskocil refused to discharge Lozada's student loans, ruling that he had failed to pass the undue hardship test established by the Second Circuit's Brunner decision. In particular, Judge Vyskocil declined to take Lozada's religious contributions into account when determining whether he could maintain a minimal standard of living while making payments on his student loans.

As Judge Vyskocil noted, Lozada's religious giving was considerable. Together, Lozada and his wife had made religious contributions totally more than $20,000 a year over the four-year period of 2013-2016.

Judge Vyskocil found Lozada's commitment to charity laudable, but she "concluded that 'when [Lozada] elects to tithe rather than pay his nondischargeable debt, he is making donations using someone else's money."

In her ruling, Judge Vyskocil pointed out that Lozada and his wife received a monthly net income of $5,942 a month. After paying reasonable household expenses (not including religious contributions), Lozada enjoyed "a healthy monthly surplus" of $1,443 a month.

This surplus, Judge Vyskocil reasoned, allowed Lozada to make religious contributions of $600 a month (approximately 10 percent of his net monthly income) and still have enough money to make monthly student-loan payments of $826 a month under an  Income Contingent Repayment Plan (ICRP).

Lozada appealed Judge Vyskocil's decision to a U.S. District Court, where Judge Alvin Hellerstein affirmed the lower court's decision. In Judge Hellerstein's view, requiring Lozada to make student-loan payments under an ICRP would not constitute an undue hardship. Moreover, the judge ruled, Lozada failed the "good faith" element of the Brunner test. Indeed, Judge Hellerstein observed, Lozada's "excess charitable contributions, reaching 35 percent of his household income, coupled with a failure to consider contributing to his student loans, undermines any inference of good faith."

It is hard to argue with Judge Hellerstein's analysis in the Lozada case. Clearly, Lozada's household income was adequate for him and his wife to make charitable contributions equal to 10 percent of their household income and still make income-based student-loan payments under an ICRP.

Nevertheless, the Lozada case illustrates the insanity of the federal student loan program. It makes no sense whatsoever for the federal government to structure the federal student loan program in such a way that a 67-year-old person can amass student-loan debt amounting to a third of a million dollars, a debt that accrues interest at the rate of more than $2,000 a month.

Furthermore, it is insane to force a man who is past retirement age to commit to a 25-year, income-contingent repayment plan that allows him to make monthly payments that are less than half the amount of accruing interest.  By the time Lozada finishes his loan obligations, he will be 92 years old, and he will owe considerably more than he owes now--certainly more than half a million dollars.

No wonder that the Democrats' siren call for massive student-loan forgiveness is so appealing to many Americans. And why not forgive billions of dollars of student debt? After, all millions of student debtors will never pay back their loans, whether or not those loans are forgiven.

Image credit: Celebrating Financial Freedom

References

In re Lozada, 604 B.R. 427 (S.D.N.Y. 2019).

Lozada v. Educational Credit Management Corporation, 594 B.R. 212 (Bankr. S.D.N.Y. 2018), aff'd, 604 B.R. 427 (S.D.N.Y. 2019).

Pew Foundation says one out of four student-loan borrowers default within 5 years: But we already knew that.

The Pew Foundation issued a report recently with this snoozer title: Student Loan System Presents Repayment Challenges.  Really? That's like saying that icebergs posed a challenge to the Titanic.

The Pew Foundation's most interesting finding--picked up by the media--was this: Almost one out of four student-loan debtors default on their loans within five years.  But this should not be a shocker. Looney and Yannelis reached basically the same finding five years ago in their report for the Brookings Institution. These researchers reported that the five-year default rate for the 2009 cohort of borrowers was 28 percent (p. 49, Table 8).

And the Pew study probably understates the crisis. The report itself acknowledged that for-profit colleges were underrepresented in its study (p. 5), and we know that almost half of the students who attend for-profit colleges default within five years.

Most importantly, the Pew study did not address the "challenge" faced by more than 7 million college borrowers who are in income-based, long-term repayment plans (IBRPs). IBRP participants are not paying off their student loans even though they are in approved repayment programs. Why? Because people in IBRPs aren't making monthly payments large enough to pay down loan accruing interest, and this interest is capitalized and rolled into their loans' principal.

As much as it pains me to say this, Education Secretary Betsy DeVos gave a clearer picture of the student-loan crisis than the Pew Foundation.  A year ago, DeVos publicly acknowledged that only one out of four student borrowers are paying down principal and interest on their loans and that 43 percent of student loans are "in distress."

For me, the most disappointing thing about the Pew report was its tepid, turgid, and tedious recommendations for addressing the student-loan crisis, which I will quote:

• Identify at-risk borrowers before they are in distress . . .
• Provide [loan] servicers with resources and comprehensive guidance . . .
• Eliminate barriers to enrollment in affordable repayment plans, such as program complexity . . .

Thanks, Pew Foundation. That was really, really helpful.

Note that the Pew Foundation said nothing about bankruptcy relief for distressed college borrowers, tax penalties for borrowers who complete their IBRPs, or the government's shameful practice of garnishing elderly defaulters' Social Security checks. Moreover, Pew said nothing about the Education Department's almost criminal administration of the Public Service Loan Forgiveness program.  And we didn't read anything about the out-of-control cost of higher education.

Let's face it.  College leaders, the federal government, and so-called policy organizations like the Pew Foundation refuse to acknowledge that the federal student-loan program is destroying the lives of millions of Americans. Instead, they are content to tinker with a system that is designed to shovel money to our bloated and corrupt universities.

America's colleges are addicted to federal money. Like a drug addict hooked on Oxycontin, they must get their regular fixes of federal cash.  After all, they've got to fund the princely salaries of college administrators and lazy, torpid professors.

Like first-class passengers on the Titanic who were sipping champagne when their ship hit an iceberg, the higher education industry thinks the flow of student-loan money will go on forever.  But a crash is coming.

Unfortunately, the people who created the student-loan crisis will be the ones floating away in the lifeboats--living off their cushy pensions and obscene retirement packages. The people who were exploited by the federal student-loan program, like the third-class passengers on the Titanic, will go down with the ship.

Lifeboats reserved for college presidents and DOE senior administrators

What happens to tenured faculty when a college shuts down?: Reflections on the closure of Marlboro College

Small liberal arts colleges are in trouble all over the United States, but the problem is most acute in New England and the Northeast. Scott Jaschik of Inside Higher Ed reported that 10 colleges are closing this year, and four of them are located in Vermont.

Small colleges with religious affiliations are also under strong pressure.  Among the 10 colleges that will close this year, five have religious ties. College of New Rochelle, Marygrove College, St. Joseph School of Nursing, and the College of St. Joseph are all Catholic institutions. Cincinnati Christian University, which will close next month, has Protestant ties.

Marlboro College, a tiny school with only 150 students, is one of the Vermont institutions that is closing this year. Marlboro transferred its $30 million endowment fund and $10 million worth of real estate to Emerson College, a Boston institution with about 4,500 students. In return, Emerson has agreed to accept Marlboro's students and all 27 of its tenured and tenure-track faculty.

As Lee Pelton, Emerson's president made clear, the transaction is not a merger. After next fall, Pelton said, "Marlboro will not exist."

Marlboro president, Kevin F. F. Quigley, said that Marlboro had "reached out" to a number of colleges before it did its deal with Emerson, but the other schools were not willing to employ Marlboro's faculty.

I took a quick look at Marlboro's faculty bios, and I was impressed. Many of the Marlboro professors are young and most have doctorates from prestigious institutions.

I was also impressed that Marlboro executed a plan that will allow the school to close with dignity while preserving the jobs of its tenured and tenure-track faculty. In essence, Marlboro turned over assets worth $40 million to a college that is willing to employ its professors.

In my view, Marlboro's closure is a model for other struggling liberal arts colleges. Most of them have declining enrollments and dwindling revenues. But many--like Marlboro--have significant endowment funds and own valuable real estate. What should a college do with those assets when it shuts down?

I can think of no better way for a dying college to divest itself of its material wealth than to devote it to the welfare of its tenured and tenure-track professors, many of whom have devoted a substantial part of their working lives to an institution that closes while they are in mid-career.

In this economic climate, even highly acclaimed tenured faculty members will have trouble finding comparable tenured positions if their college shuts down. Marlboro and Emerson performed a civic act when they worked out a deal to save 27 jobs and put Marlboro's real estate and endowment funds to good use.

Marlboro College

College life in the 1960s: College kids try to kill themselves in a 1961 Chrysler Imperial--but botch the job

I ain't hurtin' nobody. I ain't hurtin' no one.

John Prine

I enrolled at Oklahoma State University in 1966, just as the Vietnam War was heating up. The rules were quite clear. Boys could avoid the draft for four years if they kept their grades up. But if they flunked out, they’d be drafted and probably go to Vietnam.

I still remember some of my dorm buddies who lived with me in Cordell Hall, a four-story neo-Georgian monstrosity located near the ROTC drill field. No air conditioning. Most of us were poor or nearly poor or we wouldn’t have been living there.

I remember Alton and Bobby, two freshmen from southwestern Oklahoma. Alton was from the little town of Amber; Bobby was from the nearby hamlet of Pocasset.  If you asked them where they were from, they both would say Am-Po, expecting you to know that they were referring to the Amber-Pocasset Metropolitan Area.

And there was another kid whose name I’ve forgotten who was clinically shy and morbidly frail. His skin was almost translucent, which gave him the appearance of a young girl. I’m ashamed to say the guys in the dorm nicknamed him Elsie. He never objected.

Everyone liked Elsie, partly because he had something most of us didn’t have: a car. His parents loaned him their 1961 Chrysler Imperial, perhaps the ugliest car ever made. It had all sorts of buttons and gadgets, including power windows, which I had never seen before.

Elsie was incredibly generous with his car and loaned it to just about anyone who asked. One Saturday during the fall semester, Alton wanted to go to Oklahoma City to see his girlfriend, and he asked Elsie if he could borrow the Chrysler. Oklahoma City was 120 miles away, but Elsie offered to drive him there. Several bored freshmen joined the expedition, and six or seven of us piled into the Imperial for the run to OKC.

But Elsie didn’t drive us. Alton insisted on taking the wheel, and when we got out on Interstate 35, he said, “Let’s see how fast this baby can go.” In an instant, we were hurtling south at 120 miles an hour. No seat belts.

I was terrified but I didn’t have the courage to tell Alton to slow down. Then I looked through the rear window, and I saw a Highway Patrol cruiser closing in on us--siren wailing.

Alton panicked when he heard the siren. In a desperate attempt to get his speed down to double digits, he stomped down on the brake pedal and jerked up the hand brake. That definitely slowed us down.

Alton laid down about 100 feet of skid marks, which you can probably still see on Interstate 35. In an instant, the whole car was filled with smoke and the smell of burning rubber and fried brake pads.

We’re in big trouble now, I thought. But the cop didn’t seem concerned about the fact that seven idiot teenagers were apparently trying to kill themselves in a Chrysler. The cop said hardly a word; he just wrote Alton a speeding ticket and drove away in his cruiser.

Am-Po Bobby also had a car, an old Chevy Nova; and every Monday night he chauffeured a bunch of freshmen to Griff’s Drive-In. Griff’s sold tiny hamburgers for 15 cents apiece, and on Monday nights it sold them for a dime. Pooling our resources, we could usually scrape up three bucks, which would buy us 30 hamburgers. We all ate four apiece, and a couple of big eaters would eat five. Oh, we were living high!

One Monday night, we were waiting in Griff’s drive-through lane and Bobby spotted a metal gasoline can behind Griff’s back door. Bobby got out of the car, shook the can, and confirmed there was fuel in it. Free gas! Bobby put the gas can in the backseat of his car, and we picked up our 30 burgers at the drive-through window.

Unfortunately for Bobby, an alert Griff’s employee witnessed the theft and called the Stillwater police. A cruiser arrived immediately, and an elderly officer gave us all a lecture on stealing. He confiscated the gas can and then walked to the back of Bobby’s car to jot down the license plate number.

And what did Stillwater’s finest see on the rear bumper? A sticker that said, “Support Your Local Fuzz.” Now we’re really in trouble, I thought. We’re going to be arrested, OSU will kick us out of school, and we’ll all wind up in Vietnam.

But the officer had seen moron college students before and knew we were basically harmless. He just shook his head when he saw the bumper sticker and drove off without even giving us a citation.

The 1960 Chrysler Imperial: Power windows!

Oklahoma Highway Patrol: "Let's be careful out there."

Griff's Hamburgers: 10 burgers for a dollar (but only on Mondays)

Crocker v. Navient Solutions: A small win for student-loan debtors

Crocker v. Navient Solutions, a recent Fifth Circuit decision, is a small win for student-loan debtors. Essentially, the Fifth Circuit ruled that a private student loan obtained to pay for a bar review  course is dischargeable in bankruptcy. (The opinion also includes an extensive analysis on a jurisdictional issue, which will not be discussed here.)

Brian Crocker took out a $15,000 loan from Sallie Mae to pay for his bar-examination prep course. Subsequently, Crocker filed for bankruptcy and his  Sallie Mae loan was discharged.

Navient Solutions, which assumed the legal right to collect on Crocker's debt, continued trying to collect on the $15,000 loan after Crocker's bankruptcy discharge, claiming the debt was not dischargeable in bankruptcy. In August 2016, Crocker filed an adversary proceeding against Navient in the same bankruptcy court where he had obtained his bankruptcy discharge. Crocker sought a declaratory judgment that his Sallie Mae loan had been discharged and a judgment against Navient, holding it in contempt for continuing its collection efforts after Crocker's bankruptcy discharge.

A Texas bankruptcy court ruled in Crocker's favor, and Navient appealed.  The Fifth Circuit identified three types of student debt that are not dischargeable in bankruptcy without a showing of undue hardship:

• Student loans made, insured, or guaranteed by a governmental unit (11 U.S.C. § 523(a) (8) (i)), including federal student loans.

• Private student loans to attend a qualified institution (11. U.S.C. § 523 (a) (8) (B)). 

• Debt arising from "an obligation to repay funds received as an educational benefit, scholarship, or stipend" (11 U.S.C. § 523 (a) (8) (ii)).

Sallie Mae's loan to Crocker was not a governmental loan, so § 523 (a) (8) (i) did not apply. Navient conceded that the loan was not made to a qualify institution, and thus § 523 (a) (8) (B) did not apply.

Instead, Navient argued that the loan was nondischargeable under § 523(a) (ii). Navient maintained that the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act made all private student loans nondischargeable, including Sallie Mae's $15,000 loan to Crocker to pay for his bar-exam prep course.

The Fifth Circuit disagreed. The court pointed out that the statutory provision Navient relied on did not mention loans at all. Instead that provision "applies only to educational payments that are not initially loans but whose terms will create a reimbursement obligation upon the failure of conditions  of the payments."

Therefore, the court ruled, "The loans at issue here, though obtained in order to pay expenses of education, do not qualify as 'an obligation to repay funds received as an educational benefit, scholarship, or stipend' because their repayment was unconditional. They therefor are dischargeable."

As Steve Sather, a Texas bankruptcy lawyer, observed in a recent blog essay, the Crocker decision is only a small victory for student-loan debtors. It is nevertheless a significant decision because it is a reminder that not all private student loans are covered by the Bankruptcy Code's "undue hardship" provision.  Private loans taken out by law school graduates to pay for bar-examination preparation courses can be discharged in bankruptcy.

References

Crocker v. Navient Solutions, __ F.3d __, 2019 WL 5304619 (5th Cir. Oct. 22. 2019).

Steve Sather. Fifth Circuit Grants Small Victories to Student Loan Debtors, A Texas Bankruptcy Lawyer's Blog, October 26 2019, http://stevesathersbankruptcynews.blogspot.com/2019/10/fifth-circuit-grants-small-victories-to.html.

In interest of "diversity," colleges drop SAT/ACT scores for student applicants. But are the colleges sincere?

More than 1,000 colleges have dropped the ACT or SAT test as an admission requirement. According to a Washington Post story, more than half of the top 100 liberal arts colleges (as selected by U.S. News and World Report) have dropped standardize tests as part of their admission process.

The colleges will tell you they are ditching ACT and SAT tests because the tests discriminate against racial minorities and the socio-economically disadvantaged (poor people). But I think this explanation is mere blather.  The colleges are dropping standardized tests in the admissions processes for two reasons that they dare not articulate.

First, most of the elite colleges are engaging in race discrimination in making their admissions decisions.  Harvard, for example, has been accused of discriminating against Asian applicants based on an analysis of enrollment criteria. Asians lost their discrimination claim against Harvard, but they are appealing in a case that is likely going to the U.S. Supreme Court.

It is much harder for disappointed college applicants to claim they were discriminated against based on race when the objective criteria of SAT and ACT scores are jettisoned. College admission officers will argue that standardized test scores interfere with the goal of achieving diversity, which is just a disingenuous way of saying their admissions decisions are subjective and often based on race.

Regarding the less selective schools, many are ditching the ACT and SAT exams because they are so desperate for students that they've lowered their admission standards and don't want anyone to know it.  By tossing out standardized test scores, it becomes harder to document the fact that many colleges will now admit anyone who has a pulse and some student-loan money. In fact, the pulse may be optional.

A great many of the 1,000 colleges and universities that have gone test-optional for student applicants are obscure institutions that are probably struggling to keep their enrollments up. For example,  Earlham College in Richmond, Indiana. only has about 1,000 students and is facing several financial problems. The Chair of the Earlham Board of Trustees released a letter to the campus  community in 2018, which acknowledged that the college had been "running substantial operating deficits" since 2008 and that its present level of cash flow was not sustainable.

I don't have inside information about enrollment challenges at the 1,000 colleges and universities that scrapped the ACT and SAT,  but I feel sure that many of them are scrambling to survive and that the chief motivation for most of them is to juice their enrollments and not to enhance "diversity."

Photo credit: Kayana Szymczak, New York Times

Impeach DeVos, Not Trump: Democrats should focus on Betsy DeVos' outrageous mismanagement of the student-loan program

Let me start by saying this: I am a registered Democrat who voted for Bernie Sanders in the 2016 Democratic primary race in Louisiana. I will vote for a Democrat in Louisiana's 2020 primary election, although I am not happy with my choices.  I am neither a MAGA Republican nor a Never-Trumper; I just want a decent person to be President. Is that too much to ask?

I admit that I am just an old white guy who lives in Flyover Country--and a cisgendered old white guy at that. Nevertheless, I don't get the Democrats' obsession with impeaching President Trump. Congressman Schiff wants to impeach Trump over a phone call? What's that about?

I hate to be the one to break it to you, Adam, but impeachment is never going to happen.  Nancy Pelosi will never call for a vote on the matter, and the Senate will never impeach the President. The 2020 election is only 12 months away--12 months! Why don't the  Democrats focus on nominating a reasonable candidate who can defeat Trump in 2020?

On the other hand, Trump's Education Secretary, Betsy DeVos, is eminently impeachable and should be impeached. I've commented on her outrageously incompetent management of the federal student-loan program on several occasions. DeVos simply refuses to administer the government's various student-loan forgiveness programs in a competent manner. She's screwed up the Public Service Loan Forgiveness Program and the Borrower Defense program, and her agency opposes bankruptcy relief for distressed student-loan debtors--no matter how desperate a debtor's circumstances.

And now she has been held in contempt by a federal judge for defying a court order. U.S. Magistrate Judge Sallie Kim ruled that DeVos and DOE violated Judge Kim's preliminary injunction to stop collecting on student loans owed by students who attended Corinthian Colleges, a defunct for-profit college.

Judge Kim was actually pretty steamed about DOE's intransigence. At one point, the Judge said, "I'm not sending anyone to jail yet, but it's good to know I have that ability."

The unlawful collection activities were actually carried out by DOE's contracted student-loan servicers, not DOE itself. But DOE is responsible for the servicers' actions. Mark Brown, a senior DOE official, acknowledged a screw-up. "Although these actions were not done with ill intent," Brown said, "students and parents were affected and we take full responsibility for that."

If the Democrats were smarter, they would focus their impeachment energy on DeVos, not President Trump.  An impeachment inquiry could speed ahead with full compliance with due process.  There would be no need to hold secret hearings in the basement of the Capitol. DeVos' malfeasance is adequately documented by competent evidence, including several adverse court rulings against DeVos and DOE. And I predict that some Republicans in both the House and the Senate would support impeachment once the facts of her maladministration were brought to light.

And impeaching DeVos would publicize to every beaten-down student-loan debtor that the Trump administration doesn't care about them.  President Trump's total indifference to the student-loan train wreck could be exploited by the Democratic candidates who are calling for student-loan forgiveness.

But the Democrats' aren't interested in doing something sensible. Like Captain Ahab chasing the great white whale in Moby Dick, they scour the oceans of bureaucratic nonsense looking for some way to impeach President Trump.  And Trump, like Moby Dick, may wind up putting a great big hole in the Democrats' boat.

Will the Great White Whale sink the Never-Trumpers?