College leaders are the new Marlboro Man--touting dangerous products to gullible Americans

I'm old enough to remember when a lot of Americans smoked cigarettes.

People smoked on buses and airplanes, they smoked in restaurants and bars, they smoked in movie theatres. People even smoked in hospitals and grocery stores. I remember seeing a guy pick up a head of lettuce in the produce section of my local supermarket, and he had a cigarette wedged between the fingers of the same hand that grabbed the lettuce. Hey, no problem!

It's not like people didn't know that cigarettes were dangerous to our health. We all knew people who died slow, painful deaths from lung cancer and emphysema. We all saw elderly people who were basically living skeletons with sunken chests, yellowish skin, and discolored teeth. We knew why cigarettes were called coffin nails. But we ignored all that to appear cool.

Meanwhile, the cigarette industry advertised their products on television. I must have seen the Marlboro Man a thousand times on TV--that rugged, ruddy-faced cowboy with a viral cigarette clamped in his perfect teeth. But the Marlboro Man was a cynical, vicious lie.  Robert Norris, the original Marlboro Man, didn't smoke.

America's college presidents are like the cigarette industry in the 1950s. Just as Madison Avenue pitched cigarettes as sexy,  university leaders blather on and on about the value of higher education, how American graduate schools are the envy of the world, and about the big income bonus that comes with a college degree. They dress up in clown suits (academic regalia) on commencement day as if they were bestowing a high honor on the rubes by handing them diplomas.

But for millions of Americans, higher education's cheery bullshit about the benefits of a college degree are lies. More than 45 million Americans are student-loan debtors; collectively they owe $1.6 trillion. Eight million people are in income-based repayment plans that can last as long as 25 years. Millions have defaulted on student loans that they can't discharge in bankruptcy. College debt hampers Americans from buying homes, getting married, and having children.

Pompous college presidents, administrators, and professors think of themselves as superior individuals with keenly attuned social consciences and highly developed intellects. But they are lying to themselves and the world at large. In reality, they're the new Marlboro Man, selling products that they know are often dangerous.

Cigarettes are sexy and American higher education is the envy of the world.

Moody's Investor Services says 1 in 5 small private colleges face "fundamental stress"

Moody's Investor Services reported recently that 1 in 5 small, private colleges face "fundamental stress" and that as many as 15 colleges will close by the end of the year (as reported by CNBC.com). Small liberal arts colleges in the Midwest and New England are particularly under pressure, and four
Vermont colleges have closed within the past year.

What's going on?

First, changing demographics provides part of the explanation. There are simply fewer people in the traditional college-going age, and this population decline is especially acute in rural areas where a great many small colleges are located.

Second, tuition costs have risen sharply in recent years, and potential students and their parents are experiencing sticker shock at the prospect of paying $60,000 to $70,000 a year to attend a small, liberal arts college. Even though liberal arts schools have been discounting their tuition by 50 percent or more, these slashed tuition rates are still often higher than the cost of attending a public university.

Finally, fewer students want to study liberal arts, which has traditionally been the core mission of small, private colleges.  For example, the University of Tulsa, a highly regarded private university, is shifting its mission from liberal arts to science and technology and intends to cut 40 percent of its programs--primarily in the humanities and natural sciences--in order to focus on STEM-related academic programs.

Without question, many small, liberal arts colleges are facing an existential crisis, and they have tried a variety of strategies to boost their enrollments. Some have invested in athletics programs, hoping to attract students who are interested in sports. Others have rolled out new vocation-based majors like criminal justice, sports management, and business administration.

But these tactics are often unsuccessful. A college that was founded to be a traditional liberal arts institution often finds it difficult to break into new areas of study, particularly those fields that have been offered by public universities for decades.

Furthermore, new majors usually require new faculty members--and that costs money.  Colleges cannot easily lay off tenured liberal-arts professors s in order to replace them with business and criminal-justice professors. Schools that try to cut faculty positions in order to balance their budgets often run into threats of litigation, as the University of St. Thomas in Houston recently discovered.

A fair number of private colleges are going to fail in the coming years, regardless of the tactics they employ to boost their enrollments.  Obscure liberal arts schools with religious affiliations seem especially vulnerable because the millennials are far more secular than previous generations. Many young people have no interest whatsoever in religion. Moody's estimate of a 20 percent attrition rate may understate the crisis.

While shopping for a college, potential students and their parents need to realize that the small, liberal arts college they may be considering could be closing in the near future. Does anyone want to take out student loans to attend a college that could be shutting its doors within the next five or ten years?

Murrell v. Educational Education Management Corp.: An Ohio Bankruptcy Court Misinterprets "Undue Hardship"

Calvin Murrell was thrown out of work in 2000 due to knee and back injuries. Murrell then attended Stautzenberger College, a private, for-profit community college with a total enrollment of around 300 students. He obtained a degree in web tech at Stautzenberger and then attended Spring Arbor College and Owens Community College, but he failed to complete programs at these schools.

Murrell took out almost $73,000 in student loans to finance his college studies, and in 2018,  he tried to discharge this debt in bankruptcy. He maintained that being forced to repay this debt would create an "undue hardship."

Judge John Gustafson, an Ohio bankruptcy judge, applied the three-part Brunner test to determine whether it would impose an undue hardship on Murrell if he were forced to repay his loans.

"Under the Brunner test," Judge Gustafson instructed, "the debtor must prove each of the following three elements: (1) that the debtor cannot maintain, based on current income and expenses, a 'minimal' standard of living for [himself] and [his] dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans."

To obtain a discharge of his student loans, Murrell was required to prove all three elements of the Brunner test. Educational Credit Management Corporation opposed the discharge, arguing that Murrell failed to pass any of the Brunner test's three elements. ECMC produced a witness who testified that Murrell was eligible to participate in an income-based repayment plan (IBRP) that would require him to pay between $63 and $94 a month.

Judge Gustafson observed that Murrell's family income was about $44,000, consisting of $32,893 earned by Murrell's wife and $13,068 in Murrell's Social Security Disability payments. Judge Gustafson concluded that with a little belt-tightening, Murrell and his wife could make monthly student-loan payments of $63 to $94 a month and still maintain a minimal standard of living. Therefore the judge refused to discharge Murrell's student loans in bankruptcy.

In my view, Judge Gustafson misapplied the Brunner test when he ruled that Murrell's student loans were nondischargeable. The Brunner test does not ask whether a debtor can maintain a minimal standard of living if required to make token loan payments under an income-based repayment plan.  Rather it asks whether the debtor can pay off the student loans and maintain a minimal standard of living.

If Murrell signs up for an IBRP that requires him to pay $63 per month for 25 years, he will never pay off his student loans.  Quite the contrary; his student-loan debt will grow larger with each passing month.

Let us assume Murrell makes monthly payments of $63 under an IBRP. And let us further assume that his student-loan debt accrues interest at 5 percent. Interest at that rate on $73,000 amounts to $304 a month--almost five times the amount of his monthly payments.

Under an IBRP, Murrell's debt will negatively amortize as unpaid interest accumulates and becomes capitalized. Thus, the $73,000 dollars Murrell owes in 2019 will grow to a much larger number by the time 25years have passed.

The essence of Judge Gustafson's ruling is that no one is eligible to discharge student loans in bankruptcy because it is always possible to make token monthly payments under an IBRP. Indeed, debtors in IBRPs who are unemployed and have no income are not required to make any payments on their loans.

Currently, there are 8 million student-loan debtors enrolled in IBRPs.  Virtually none of these people are paying down the principal on their loans. When their repayment obligations come to an end--after 20 or 25 years--they will owe considerably more than they borrowed. This amassed debt will be forgiven, but the amount of the forgiven loans will be taxable to them as income.

This is insane. The only purpose of these income-based repayment plans is to hide the amount of student-loan debt that is not being paid off--hundreds of billion dollars.

References

Murrell v. Educational Management Corporation, 505 B.R. 464 (Bankr. N.D. Ohio 2019).

Bakersfield College v. California Community College Athletic Association: Court Rules That Mandatory Arbitration Clause is Unconscionable

   In late October, a California appellate court ruled that a mandatory arbitration agreement imposed by the California Community College Athletic Association against a member college was unconscionable and therefore unenforceable. The court concluded that the agreement had been imposed by the Athletic Association against a weaker party that had no power to negotiate and thus was procedurally unconscionable. In addition, the language of the agreement favored the Athletic Association at the expense of member colleges and was substantially unconscionable as well.

Facts

Bakersfield College, a California community college, operates a varsity football program. In order to participate in intercollegiate football competition, the college is required to be a member of the California Community College Athletic Association (the Athletic Association) and to abide by the Athletic Association’s constitution and bylaws.

   The Athletic Association’s constitution authorizes the commissioner of the Southern California Football Association (the Football Association) to impose sanctions and penalties on member colleges.  The constitution also states that a member college that objects to a sanction or penalty may appeal the commissioner’s ruling in a process that ends in binding arbitration.

In May 2013, Bakersfield College was penalized and sanctioned for violating the Athletic Foundation’s bylaws because “the College had provided football players with meals and access to work and housing opportunities not available to others students.” The College appealed this decision through the appellate process outlined in the Athletic Association’s constitution, but it declined to submit to binding arbitration. Instead, Bakersfield filed suit against the Athletic Association and the Football Association for breach of contract and breach of the fair procedure doctrine

   The two Associations argued that Bakersfield had failed to exhaust its administrative remedies by foregoing the binding arbitration process. Bakersfield responded by arguing that it should be excused from participating in binding arbitration because the arbitration provision was unconscionable under California law.  A California trial court sided with the two defendant Associations and ruled that Bakersfield’s lawsuit was barred because the college had not exhausted its administrative remedies.

The California Court of Appeal (Third District) Decision

   On appeal, the California Court of Appeal (Third District) reversed the trial court’s decision. In the appellate court’s view, the challenged arbitration agreement was unconscionable under California law and could not be enforced.   

   The California Court of Appeal began its analysis by stating the law of unconscionability in California. “Unconscionability consists of both procedural and substantive elements,” the court explained.  The court then examined whether the arbitration provision in the Athletic Association’s constitution was procedurally unconscionable.  “When the weaker party is presented the [arbitration] clause and told to ‘take it or leave it’ without the opportunity for meaningful negotiation, oppression, and therefore procedural unconscionability,” the court stated.

   In the case before it, the court continued, “the College had no ability to individually negotiate the terms of the contract at the time it was made. It could not opt-out of the arbitration provision as drafted by the Athletic Association. The uncontroverted evidence supports a finding of procedural unconscionability.” As the court pointed out, Bakersfield had to accept the Athletic Association’s terms if it wanted to participate in intercollegiate athletics, a matter of considerable importance to the college and its students.  “To provide this opportunity to its students, the College had no other alternative -- it had to be a member of the Athletic Association.”

   The court went on to consider whether the arbitration provision was substantially unconscionable.  In making this assessment, the court stated, the paramount consideration is mutuality. “An arbitration agreement requires a ‘modicum of bilaterality,’ meaning the drafter cannot require another to submit to arbitration to pursue a claim but not accept the same limitation when it would act as the plaintiff, without some reasonable justification for such one-sidedness based on business realities.”   

   In assessing the Athletic Association’s arbitration provision, the California appellate court found no mutuality. “The binding arbitration procedure applies only to appeals by member colleges of penalty and sanctions decisions. It is not an alternative dispute procedure applied evenhandedly to all disputes between the parties.” In particular, the provision did not require the Athletic Association to submit its disputes with member colleges to binding arbitration, and thus the provision lacked mutuality.

   The court pointed out other elements of the arbitration agreement that disfavored member colleges.  For example, one subsection authorized the arbitration panel to award costs and attorney fees against a college if the Athletic Association prevailed in arbitration, but there was no parallel language that authorized the panel to award costs against the Association if the college prevailed.   

   The court was also troubled by the manner in which arbitration panel members were selected. Although colleges could nominate panel members, “in practice, the entire master list was solicited, and appointed, solely by the [Athletic Association’s] Executive Director, with no input from member colleges.” In fact, the court noted, “the Athletic Association unilaterally selected all individuals on the master arbitration panel list and did so in secrecy, precluding the colleges from commenting on or objecting to any potentially biased panel member.” Such a procedure, the court state, “does not achieve the minimum levels of integrity required to enforce an agreement to arbitrate.”

   In conclusion, the California Court of Appeal ruled the arbitration agreement that the Athletic Association sought to enforce was both procedurally and substantively unconscionable. “The arbitration agreement is therefore unenforceable,” the court summarized, “and the trial court erred in compelling arbitration of the College’s claims.”

Conclusion

   The court’s decision in the Bakersfield College case has important implications for students who attend for-profit colleges. These colleges typically force students to sign mandatory arbitration agreements as a condition of enrollment. A student has no power to negotiate with a for-profit college regarding arbitration provisions—which are offered on a “take it or leave it” basis. Based on the reasoning in the Bakersfield College case, such arbitration agreements are procedurally unconscionable.   

    Likewise, the terms of a for-profit college’s arbitration agreement may disadvantage students who wish to resolve complaints against their college. For example, in Magno v. College Network, Inc., an arbitration provision forced California students to arbitrate their disputes with a for-profit education provider in Indiana.  Such language, a California court ruled, disadvantaged students in a way that made the arbitration agreement substantively unconscionable and unenforceable.   

   Arbitration agreements have traditionally been favored by the courts. In Dicent v. Kaplan University, an appellate court recently forced a student to arbitrate her claim against a for-profit college rather than litigate. The Bakersfield College provision, which invalidated an arbitration provision as being procedurally and substantively unconscionable, provides strong support for students attending for-profit colleges who want to invalidate a for-profit college’s arbitration agreement and proceed directly to litigation.

References

Bakersfield Coll. v. Calif. Community Coll. Athletic Assoc., __ Cal.Rptr.3d --, 41 Cal.App.5th 753, 2019  WL 5616682 753 (2019).

Dicent v. Kaplan Univ., 758 Fed. Appx. 311 (3d Cir. 2019) (per curiam).

Magno v. College Network, Inc., 204 Cal.Rptr.3d 829332 Ed. Law Rep. 1028 (Cal. Ct. App. 2016). 

Note: A longer version of this article has been published in School Law Reporter, a publication of the Education Law Association.

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