Bipartisan Senate Bill Would Permit Debtors to Cancel Student Loans in Bankruptcy After 10 years: Too Good To Be True?

 Is this the year of Jubilee? Is this the year that distressed student-loan debtors finally get to shake off mountainous debt in the bankruptcy courts? 

Maybe.

This week, Senator Richard Durbin, an Illinois Democrat, and Senator John Cornyn, a Texas Republican,  filed a bill that would allow college-loan debtors to discharge their federal student loans in bankruptcy after a ten-year waiting period.  

This bipartisan bill, titled the Fresh Start Through Bankruptcy Act, would also require colleges with high student-loan default rates to partially repay the government for the cost of discharged loans.

 Will this bill make it through Congress? After all, Senators Elizabeth Warren and Claire McCaskill filed legislation to stop the Department of Education from garnishing the Social Security checks of elderly loan defaulters. That proposal went nowhere. And Representatives John Delaney and John Katko filed a bill to take the "undue hardship" language out of the Bankruptcy Code, and that bill died a quiet death.

I am enthusiastically in favor of the bill filed by Senators Durbin and Cornyn. I hope it passes. 

But if it does, Congress will need to repeal the Grad PLUS Act, which allows students to borrow unlimited amounts of money for graduate school. We can't let someone run up a quarter of a million dollars in student-loan debt getting a doctoral degree in music theory, and then shed all that debt after ten years.

And we will undoubtedly need more bankruptcy judges. Approximately 45 million people are carrying student loans. Several million of them will be immediately eligible for bankruptcy relief if the Durbin-Cornyn bill passes. That's a lot of people showing up at the nation's federal courthouses.

Congress will also have to address the abusive for-profit college industry if overburdened student debtors get access to the bankruptcy courts.  As student debt gets cleared through bankruptcy, it will quickly become evident that many bankrupt student borrowers acquired their debt at for-profit colleges.

But perhaps those are reforms for another day.

I have been arguing for bankruptcy relief for student-loan debtors for more than 20 years. If the Durbin-Cornyn bill passes, what will I write about? 

I may have to say, as the Lone Ranger often observed at the end of his weekly television show, "My work here is done."

On the other hand, who really believes Congress will do the right thing?

The Lone Ranger: "My work here is done."

Newsweek reports: Parent Plus Loans 'Are Fraught with Peril'

 Years ago, I was strolling along a lakeside hiking trail in a Dallas-area park. As I was walking across a wooden bridge, I looked down to see a ball of wriggling snakes below me.

It was a big cluster--about the size of a beachball. It was a scary sight, and I didn't stick around long enough to determine whether the snakes were poisonous. I just hurried on my way.

The Department of Education's Parent PLUS program is like a big ball of snakes. The program has become so predatory, so large, and so politically charged that we don't want to even try to untangle it.  We just want to hurry along without thinking about it.

Parent PLUS is a federal program that lends money to parents to help them pay for their children's education. Although Congress supposedly intended the program to help affluent families, six out of ten parent borrowers are from low-income households.  And, as Matt Krupnick reported for Newsweek, at 140 schools, 80 percent of parent borrowers are in low-income homes.

Parent PLUS default rates are high. According to a Newsweek analysis, nearly ten percent of parents at 1000 colleges defaulted or were seriously late with payments within just two years of their child left college. At some schools, Parent PLUS default rates ran as high as 30 and even 40 percent.

And borrowing costs are high: "6.28 percent for the 2021-2022 academic year plus an upfront fee of 4.22 percent" (as reported by Newsweek).

In 2019-2020, parents took out Parent PLUS loans on behalf of three-quarters of a million students, and the loan amounts averaged about $16,000. 

But the average Parent PLUS loan at some colleges is much larger. At Spelman College, an HBCU in Atlanta, the median Parent PLUS loan was $85,000 for parents whose children graduated or left school between 2017 and 2019.

Other schools with high Parent PLUS loan amounts include New York University (almost $67,000) and Loyola Marymount in Los Angeles ($60,000). The median loan amount is also high at several art and music schools: Berklee College of Music in Boston, Pratt Institute in Brooklyn, and Savannah College of Art and Design in Georgia.

Newsweek, the Wall Street Journal, and other news media have shown that some colleges are taking advantage of their students' parents by encouraging them to take out loans in addition to the federal loans and Pell grants that students receive on their own.

This is predatory behavior. And parents who take out Parent PLUS loans will find it is almost impossible to discharge these loans in bankruptcy.

Congress needs to shut down the Parent PLUS program. Or at the very least, Congress should amend the Bankruptcy Code to allow financially distressed parents to discharge these loans in bankruptcy.

But Congress will probably take no action. It sees the Parent PLUS program as a big ball of snakes, and no politician has the guts to close down this pernicious scam against low-income parents.

The Parent PLUS program is a ball of snakes.

Do you feel the love? Universities pay off student debts with your money

 I bought a Subaru in 2019, and the company promised to make a $250 donation to one of four Subaru-selected charities.  Subaru calls this program "Share the Love."

As I recall, I selected Meals on Wheels, and I was glad to have Subaru donate some money to that worthy charity on my behalf.

Nevertheless, I feel sure that Subaru took a tax deduction for that donation, and I suspect that Subaru priced that $250 into the amount I paid for the car. If so, Subaru was taking credit for a charitable contribution that was indirectly being made by me.

Something like that is happening with American universities using federal COVID money to pay off student loans.  That money is not university money--that's your money.

For example, New York Governor Andrew Cuomo announced the CUNY Comeback Program, a state initiative to forgive $125 million in student debt owed by about 50,000 students who attend City University of New York.

But get this. CUNY and the state of New York are not contributing one dime to the CUNY Comeback Program.  All $125 million is coming from federal  COVID relief money.  In other words, American taxpayers from all fifty states will be contributing through their taxes to a relief program that benefits 50,000 students who attended one university located in New York City.

And think about this. CUNY students will not see any of this money. Nor will any of these funds go to help students pay off their federal or private loans. It's all going to CUNY.

Basically, CUNYis writing off $125 million in money owed to the university by its students and paying itself with federal grant funds.

And how did 50,000 CUNY students wind up owing CUNY so much money in the first place? My guess is this money primarily represents fees and penalties CUNY tacked on to students' tuition bills--late payments, parking fees, graduation fees, etc. 

And I think it is safe to assume that a significant percentage of this debt was uncollectible. To the extent this is true, CUNY engineered a windfall for itself--$125 million in federal money flowed directly into its coffers to clear debts that students might never have repaid.

Don't get me wrong. As I have said many times, I favor any scheme that offers relief to college borrowers, no matter how poorly the plan is devised.  And CUNY's Comeback program will clear some debt owed by its students.

But let's be honest about what is going on. CUNY and other universities have taken federal COVID relief money and used it to clear debt owed by their students directly to the institutions. Wilberforce University, a private HBCU in Ohio, is another college using federal funds to pay off student debt owed to itself.

I think many colleges are doing what CUNY and Wilberforce are doing--using federal money to pay off student debts that are owed to themselves. And then they pat themselves on the back for being compassionate.

But here is the real tragedy about the billions of COVID relief dollars the feds sent to American colleges over the past year. Many of these schools would have closed had they not gotten massive infusions of federal cash. These institutions weren't attracting enough tuition-paying students to pay their bills.

The U.S. Department of Education propped up many faltering colleges with COVID relief money, postponing the day when they will close. In the meantime, hundreds of thousands of students are taking out federal and private loans to pay tuition to colleges on their death beds--colleges that will croak in the years to come.

Is that a good policy? I don't think so.

Jornada del Muerto: People who take out student loans but don't graduate are on "the route of the dead man"

 Jornada del Muerto is a hundred-mile stretch of the Camino Real, which once ran from Mexico City to the northernmost outpost  of the Spanish colonial empire.  

There was no water on this stretch of the Camino, no livestock forage, and no firewood.  Literally, the Jornada del Muerto was the "route of the dead man."

Nevertheless, travelers in the 17th and 18th centuries could survive the Jornada if they prepared by taking plenty of water, watering their horses just before embarking, and traveling quickly over this desert road.

Many young people believe their college years will be an exciting journey that leads to a good job and a middle-class life. But people who leave college with a lot of debt and no diploma may find that they would have been better off financially if they had not gone to college at all.  In fact, their trip through college could turn out to be a modern-day journey of death--at least financial death.

As Professor Phillip Levine put it, college dropouts "ma[ke] an investment that ha[s] no return." They take out student loans but never obtain the credential that enables them to land a good job.

Not surprisingly, non-completers have high student-loan default rates--three times higher than individuals who graduate. 

In my view, too many young people look upon their college years as a golden time of unbridled freedom, casual sex, and binge drinking--all paid for with student-loan dollars.

That could be a big mistake--especially for students who take on too much college debt and never get a diploma.

El Jornada del Muerto: Don't take a dead man's route through college.

In re Standish: Should you be required to use your inheritance to pay off student debt?

 Martha Standish took out student loans when she was in her late 40s to get an undergraduate degree in accounting. Later she took out a Parent Plus Loan to help her daughter with college expenses.

Eleven years after graduating, Standish filed an adversary proceeding in a Kansas bankruptcy court seeking to discharge about $30,000 in student loans. By this time, she was 63 years old. She made $18.36 an hour working at an engineering firm, and her expenses slightly exceeded her income.

Bankruptcy Judge Robert Berger applied the Brunner test in deciding whether Ms. Standish qualified to have her student loans discharged under the Bankruptcy Code's "undue hardship" rule.  To be entitled to a student-loan discharge, Standish was required to make three showings:

1) "[S]he cannot maintain a minimal standard of living for herself and her dependents if forced to repay her student loans."

2)  "[A]dditional circumstances exist indicating that this state of affairs will persist [for] a significant portion of the repayment period . . . ."

3) "[S]he made good faith efforts to repay her loans."

After an extensive analysis, Judge Berger ruled in Standish's favor on two parts of the three-part Brunner test.  

First, he ruled that Standish could not maintain a minimal standard of living and make payments on her student loans. Thus, she met the first part of the Brunner test.

Second, Judge Berger ruled that Standish's dismal economic circumstances were unlikely to improve enough for her to pay off her student loans in the future. "As her age advances and her health deteriorates, she will soon reach a point at which her continuing employment is no longer possible," the judge observed. Moreover, Standish was unlikely to see her income go up. Based on these facts, Judge Berger ruled that Standish met the second part of the Brunner test.

Finally, regarding Brunner's "good faith" prong, Judge Brunner noted approvingly that Standish had "diligently minimized her expenses while maximizing the income she could earn with her degree." She also made payments on some of her loans while deferring others.

Nevertheless, Judge Berger ruled that Standish failed the good-faith prong of the Brunner test. 

Why? Because she received an inheritance and did not use the inheritance money to pay off her student loans. Instead, she used her inheritance to help pay for her daughter's education and other expenses. 

As Judge Berger explained:

[Standish's] decision to dedicate her inheritance to her daughter's education and other expenses prohibits the Court from finding that her pursuit of a discharge is in good faith. [Standish] received around $45,000 from her mother's estate. None of that money was used to pay the student loans. It is notable that this money would have been enough to pay off all or almost all her student loans.

Judge Berger clearly sympathized with Ms. Standish. He ruled in her favor on two parts of the Brunner test and only ruled against her on the good-faith standard because of her inheritance. "It is a tragic irony,' Judge Berger wrote, "that [Standish's] very efforts to relieve her daughter of the financial enserfment caused by student loan debt doomed her effort to discharge her own student loans."

Millions of Americans are burdened by student loans that prevent them from buying a home or saving for retirement. Some are probably counting on an inheritance to offset the catastrophe of their student debt.

But Judge Berger's decision--which is in harmony with current law--should be a wake-up call to student debtors who believe an inheritance will allow them to retire with dignity despite crushing student debt. As the Standish decision illustrates, an inheritance might foreclose bankruptcy relief for student borrowers even if they are otherwise qualified for relief under Brunner.

And--even more chilling to think about--the feds might try to garnish inheritance money from people who defaulted on their student loans. To my knowledge, this has not happened yet, but that possibility should not be discounted. 

Just another reason why Congress should amend the Bankruptcy Code and allow honest debtors to discharge their student loans in bankruptcy like any other nonsecured debt.

References

In re Standish, 628 B.R. 692 (Bankr. D. Kan. 2020).

"Can too many brainy people be a dangerous thing?" Overproduction of graduate degrees may lead to political instability

 Peter Turchin wrote an essay for Nature magazine, in which he predicted growing instability for the United States and Europe. 

Why? Turchin thinks western society has produced too many graduates with advanced degrees. This "overproduction of elites" has created a large class of unhappy people--many of whom are drifting into radical politics.

According to Turchin's thesis (summarized in The Economist), the various would-be elites struggle against each other for wealth and prestige. The conflict becomes particularly intense during a time of growing inequality. 

"The rewards for being at the top are then especially lucrative, both in terms of earning power and political influence, and those who miss out feel the loss more keenly."

Without question, American universities have produced too many people with advanced degrees--degrees that often do not bring enhanced status or wealth. The schools have turned out too many lawyers, too many MBA graduates, too many people with advanced soft-skill degrees in ethnic studies, gender studies, and diversity.

Most people who get these advanced degrees take out student loans to finance their studies--often loans in six figures. As the Wall Street Journal reported a few days ago, a high percentage of people with master's degrees from such elite institutions as Harvard and Columbia don't find jobs that pay enough for them to service their student loan debt.

As our universities create more and more would-be elites, their graduates become angrier and angrier. "Articulate, educated people rebel, producing a scramble for political and economic power."

I think Professor Turchin has analyzed our present malaise quite perceptively. Millions of Americans are living in a condition of barely contained rage.

But, in my view, these would-be elites have not yet focused their anger in the right direction. All those millions of people who took out massive student loans in the hope of improving their social and economic status should be angry at the universities that fleeced them and the politicians that refuse to reform the federal student loan program.

Unfortunately, our colleges have not given their graduates the problem-solving and analytical skills they need to figure out who screwed them over. Nevertheless, I think the rubes will eventually figure it out; when they do, there will be hell to pay.

Yucking it up at Harvard: Such fun to fleece the rubes!

The Ivy League's Biggest Scam: Expensive Graduate Degrees That Don't Pay Off

 If you are thinking about enrolling in a pricey Ivy League graduate program, read a recent Wall Street Journal article titled "'Financially Hobbled for Life': The Elite Master's Degrees That Don't Pay Off." 

Reporters Melissa Korn and Andrea Fuller report on a WSJ analysis of student debt owed by people who graduated from prestigious schools like Harvard, NYU, and Columbia. Two years after getting degrees from these toney joints, a high percentage of elite-school graduates were not working in jobs that would allow them to pay off their student loans.

For example, a New Jersey guy got a master's degree in Fine Arts in film at Columbia. Two years after graduating, he owes nearly $300,000 in student loans (including interest) and earns between $30,000 and $60,000 a year. Will this man ever pay off his student loans? Not bloody likely.

And this is not an isolated example. The WSJ reported that the median student-loan debt for Columbia's film program graduates was $171,000 in 2017-2018.  How many of those people are earning $171,000 in their current jobs? How many will ever pay off their student loans?

What attracts bright people to expensive Ivy League graduate programs? As one Columbia film graduate said, "We were told by the establishment our whole lives this was the way to jump social classes."

But we were told wrong. I got an essentially useless doctorate from Harvard, thinking the degree would erase Oklahoma from my vita. But it didn't. I still have range dust in my diction, and I still see the world much like my hard-scrabble ancestors saw it--the ones who lived through the Dust Bowl.

The WSJ analysis focuses mainly on Columbia University's film program and its graduate program in theatre arts. But there are other unindicted co-conspirators.  

Harvard's master of education degree, for example, is a scam.   You can get a master's degree from Harvard Graduate School of Education in only nine months, but the total cost of that experience is $85,000 (including room and board). 

I picked up a Harvard master's degree as I went through Harvard's doctoral program. I was proud of it at the time. I went to the graduation ceremony (very posh) and even framed the diploma.

But I no longer put that degree on my vita, and I lost the diploma somewhere along the way.  Thinking back on that experience, I wonder at my naivete.  I sat in packed classrooms containing as many as 200 students, and most of my teachers were nontenured instructors.  

One of my Harvard professors enjoyed rock-star status while I was there. She gave one two-hour lecture a week for a four-hour course. Her graduate students taught the other two hours.  Office hours? If you wanted to see this professor, you had to submit a written petition to one of her graduate students explaining why your appointment was worth this professor's precious time.

I say again. If you are thinking about taking out loans to get an Ivy League master's degree, read the WSJ article first.  If you still want to pursue that path, consult a good therapist--because you are delusional.

If you are from Oklahoma, a Harvard degree won't take the range dust out of your diction.