July 6, 2020

Debt relief is now harder for students of for-profit colleges

[Cross-posted from The Hill]

By John Patrick Hunt

For-profit colleges are accused of deceiving students across the nation and leaving them with a legacy of student debt. Predatory schools allegedly targeted veterans for their GI benefits and also set their sights on lower-income communities and communities of color.

Now, new, controversial rules will make it more difficult for deceived student borrowers to get relief from their loans. The rules went into effect July 1, after President Trump — ignoring veterans and consumer groups — vetoed a resolution that would have stopped them.

More than 300,000 student borrowers have applied to the Department of Education for loan relief. based on school misconduct. The collapse of large chains of for-profit schools such as Corinthian CollegesITT, and the Art Institutes have highlighted allegations of false job placement statistics, misleading accreditation claims, deceptive claims about financial aid, and costs of attendance, and more.

After years of wrangling, in late 2018 a court ordered into effect rules the Obama administration had drafted to help deceived borrowers. But by that time, the department, now led by Secretary Betsy DeVos, was far along in drafting new rules. 

The DeVos rules make it harder for borrowers to get relief in many ways. One critical change is that the department can no longer handle similar claims in batches, for example providing relief to everyone who entered a program after the school lied about employment statistics. Now each individual borrower is on their own.

Moreover, those individual borrowers now must prove that the school made misrepresentation with the knowledge that it was false or with reckless disregard for the truth. An individual borrower usually will not be able to prove a school’s state of mind — the rules do not say how borrowers can get evidence on the point — so opponents of the new rules have aptly described them as imposing a “near-impossible” standard of proof. 

Although a pending lawsuit challenges the rules, its prospects are uncertain. With the Education Department abdicating its responsibility to protect student borrowers from fraud and deception, it is time to think about consumer bankruptcy as another avenue for relief. 

Despite a perception that it is impossible to escape student loans in bankruptcy, studies have found that 40-60 percent of borrowers who actually seek to do so enjoy at least some success. The main obstacle for the other 40-60 percent is the requirement, unique to student loans, that the borrower show “undue hardship” to get a discharge.

In evaluating undue hardship, courts typically look to factors such as the debtor’s age, health, and family responsibilities, as well as the repayment efforts the debtor has already made. By contrast, courts almost never consider whether the borrower was tricked into taking out the loan in the first place.

It is not entirely clear why this is so. Perhaps it is because courts developed their tests for undue hardship before enrollment at for-profit schools took off. For-profits reportedly have accounted for over 98 percent of higher education fraud complaints.

It is now time for a change. Bankruptcy courts should start to consider whether the school deceived the borrower into enrolling. Dictionaries tell us that the word “undue” means unjustifiably great. As between two borrowers, each of whom will suffer equally in trying to repay student loans, the one who was deceived has a stronger claim that hardship is “undue.”

The federal government makes most student loans, and it might be argued that the government is not responsible for schools’ misconduct. But since 1976, private consumer lenders have been responsible for sellers’ deception if the seller refers the buyer to the lender. Schools do more than “refer” students to federal student loans; they run the entire process of originating the loans under the department’s supervision.

Chapter 7 bankruptcy can affect credit scores, cause social stigma, and require the sale of the debtor’s property. It will not be an attractive option for all victimized borrowers.

However, many deceived borrowers must be in such financial distress that bankruptcy makes sense. Courts can apply bankruptcy law to offer a greater chance of relief than the DeVos rules do. And most importantly, bankruptcy courts can provide relief even if the political process in Washington, D.C is stalled.

Student loans are a source of rising anger and frustration, and loans arising from fraud are among the most infuriating. Bankruptcy courts must step in to help where the education department has failed.

July 15, 2019

Student loan borrowers are defaulting yearly -- how can we fix it?

[Cross-posted from The Hill]

Over a million borrowers defaulted on student loans last year. Many of those carrying this debt file for bankruptcy. In fact, an estimated one-third of bankruptcies involve student loans. But what many people might not know is that in bankruptcy, student loan debt is rarely forgiven. One researcher found that of over 230,000 student-loan borrowers who filed bankruptcy in 2007, under 450 — less than 0.2 percent — even tried to discharge their education loans. 

Presidential candidate Beto O’Rourke just proposed a large-scale debt-forgiveness program to help address the problem. Fellow candidates Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) already offer such programs. But such relief will come, if at all, after the presidential election. In the meantime, bankruptcy should be a more readily available option for truly overwhelmed borrowers.

Congress is considering bills proposed by Warren and Sen. Richard Durbin (D-Ill.) and by Reps. John Katko (R-N.Y.) and Jerrold Nadler (D-N.Y.) that would make it easier for borrowers to escape, or discharge, student loans in bankruptcy. Recently, the House Judiciary Committee held hearings on student loan bankruptcy.

The bills would eliminate a requirement that applies to student loans and not to any other type of debt: To get a discharge, the student-loan borrower must undertake the daunting task of suing the creditor within the bankruptcy and proving that repayment would cause the borrower “undue hardship.” 

By severely restricting bankruptcy relief, the undue-hardship requirement undercuts the basic purposes of the student loan programs: equal access to higher education, benefiting society through educating the population, and helping students.

Excessive debt can undermine access to education. Research has shown that high undergraduate borrowing is associated with lower graduation rates and with not pursuing further education

Bankruptcy can help tear down this barrier. It is a fundamental premise of American bankruptcy law that bankruptcy discharge is a powerful remedy for discouragement caused by unmanageable debt, and that notion applies fully to education debt. 

The undue-hardship requirement also can interfere with education’s benefits to society. In a recent Florida case, the debtor worked at a Salvation Army shelter as a counselor to battered and abused women. According to the record, she was “at the top of her profession” and “unlikely to find other work in her field that would pay more.” 

The court refused to grant relief, no matter how low her standard of living. According to the court, a debtor cannot claim undue hardship if she “choose[s]” to work only in the field in which she was trained. The court effectively told the debtor to abandon her successful, if lower-paying, career to try to make more money to pay loans. It interfered not just with her own career choice, but with society’s ability to benefit from her education.

Finally, the undue-hardship requirement transforms an intended benefit into a high-stakes gamble. Congress intended borrowers to repay out of increased earnings, not to suffer because of failed educational investments

Of course, student loans can help borrowers by making education possible. But loans can also harm students. Researchers have found links between education debt and lower income, net worth, and probability of owning a house or car, as well as self-reported mental health, life satisfaction, and well-being

The harms can outweigh the benefits. For example, one bankrupt debtor borrowed over $50,000 for an information management master’s degree, could not find a job in the field, and worked as a telemarketer. The gamble did not pay off for him. 

Congress should enact legislation, such as that under consideration, to alleviate or eliminate the “undue hardship” requirement that obstructs bankruptcy relief for overwhelmed student borrowers. But even if Congress does not act, other actors should step in to limit the harm caused by the undue-hardship requirement.

The Department of Education makes the rules governing student loans issued under federal programs — the large majority of student loans outstanding. The department is considering changing those rules. It should, as others have suggested, adopt a policy of agreeing to discharge under certain defined circumstances that indicate severe hardship and inability to pay, such as when the debtor is disabled and has an income under 150 percent of the poverty level. By sparing such struggling borrowers the hassle of litigating a case in bankruptcy court and by providing clear rules, such a decision could help thousands each year. 

The courts have broad latitude to interpret “undue hardship.” They should move toward granting discharge more consistently and freely. For example, they should stop insisting that debtors abandon callings at which they have achieved success so that they can repay debts. Further, courts should allow discharge when the borrower cannot repay the loans within a reasonable time, such as 10 years, while maintaining a lifestyle well above the poverty level.

Thus, there are several ways to mitigate the undue-hardship requirement’s interference with achieving the student-loan programs’ goals. With over a million borrowers defaulting each year, the need for action — one way or another — is urgent.

 

July 15, 2019

Student loan borrowers are defaulting yearly -- how can we fix it?

[Cross-posted from The Hill]

Over a million borrowers defaulted on student loans last year. Many of those carrying this debt file for bankruptcy. In fact, an estimated one-third of bankruptcies involve student loans. But what many people might not know is that in bankruptcy, student loan debt is rarely forgiven. One researcher found that of over 230,000 student-loan borrowers who filed bankruptcy in 2007, under 450 — less than 0.2 percent — even tried to discharge their education loans. 

Presidential candidate Beto O’Rourke just proposed a large-scale debt-forgiveness program to help address the problem. Fellow candidates Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) already offer such programs. But such relief will come, if at all, after the presidential election. In the meantime, bankruptcy should be a more readily available option for truly overwhelmed borrowers.

Congress is considering bills proposed by Warren and Sen. Richard Durbin (D-Ill.) and by Reps. John Katko (R-N.Y.) and Jerrold Nadler (D-N.Y.) that would make it easier for borrowers to escape, or discharge, student loans in bankruptcy. Recently, the House Judiciary Committee held hearings on student loan bankruptcy.

The bills would eliminate a requirement that applies to student loans and not to any other type of debt: To get a discharge, the student-loan borrower must undertake the daunting task of suing the creditor within the bankruptcy and proving that repayment would cause the borrower “undue hardship.” 

By severely restricting bankruptcy relief, the undue-hardship requirement undercuts the basic purposes of the student loan programs: equal access to higher education, benefiting society through educating the population, and helping students.

Excessive debt can undermine access to education. Research has shown that high undergraduate borrowing is associated with lower graduation rates and with not pursuing further education

Bankruptcy can help tear down this barrier. It is a fundamental premise of American bankruptcy law that bankruptcy discharge is a powerful remedy for discouragement caused by unmanageable debt, and that notion applies fully to education debt. 

The undue-hardship requirement also can interfere with education’s benefits to society. In a recent Florida case, the debtor worked at a Salvation Army shelter as a counselor to battered and abused women. According to the record, she was “at the top of her profession” and “unlikely to find other work in her field that would pay more.” 

The court refused to grant relief, no matter how low her standard of living. According to the court, a debtor cannot claim undue hardship if she “choose[s]” to work only in the field in which she was trained. The court effectively told the debtor to abandon her successful, if lower-paying, career to try to make more money to pay loans. It interfered not just with her own career choice, but with society’s ability to benefit from her education.

Finally, the undue-hardship requirement transforms an intended benefit into a high-stakes gamble. Congress intended borrowers to repay out of increased earnings, not to suffer because of failed educational investments

Of course, student loans can help borrowers by making education possible. But loans can also harm students. Researchers have found links between education debt and lower income, net worth, and probability of owning a house or car, as well as self-reported mental health, life satisfaction, and well-being

The harms can outweigh the benefits. For example, one bankrupt debtor borrowed over $50,000 for an information management master’s degree, could not find a job in the field, and worked as a telemarketer. The gamble did not pay off for him. 

Congress should enact legislation, such as that under consideration, to alleviate or eliminate the “undue hardship” requirement that obstructs bankruptcy relief for overwhelmed student borrowers. But even if Congress does not act, other actors should step in to limit the harm caused by the undue-hardship requirement.

The Department of Education makes the rules governing student loans issued under federal programs — the large majority of student loans outstanding. The department is considering changing those rules. It should, as others have suggested, adopt a policy of agreeing to discharge under certain defined circumstances that indicate severe hardship and inability to pay, such as when the debtor is disabled and has an income under 150 percent of the poverty level. By sparing such struggling borrowers the hassle of litigating a case in bankruptcy court and by providing clear rules, such a decision could help thousands each year. 

The courts have broad latitude to interpret “undue hardship.” They should move toward granting discharge more consistently and freely. For example, they should stop insisting that debtors abandon callings at which they have achieved success so that they can repay debts. Further, courts should allow discharge when the borrower cannot repay the loans within a reasonable time, such as 10 years, while maintaining a lifestyle well above the poverty level.

Thus, there are several ways to mitigate the undue-hardship requirement’s interference with achieving the student-loan programs’ goals. With over a million borrowers defaulting each year, the need for action — one way or another — is urgent.