The Income-based Repayment Plans and For-profit Education: How Does This Combination Affect the Question to Include Student Loans in Bankruptcy?
| Publication year | 2016 |
The Income-Based Repayment Plans and For-Profit Education: How Does This Combination Affect the Question to Include Student Loans in Bankruptcy?
Kevin J. Smith
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Introduction: For-Profit Education and Student Loan Repayment Plans............................................604
I. Repayment Plans..................................................................611
A. The Income-Based Repayment Plans.............................612
B. The Gates Foundation....................................................620
C. Free Community College Tuition...................................622
II. Pro-Profit and the Lawsuit Tsunami .............................623
A. Corinthian Colleges.......................................................623
B. The Non-Profit Disguise and the Motivation.................625
1. Gainful Employment..................................................626
2. Stevens-Henager College...........................................629
3. Other Schools and the 90/10 Rule.............................632
III. The History of Opposition................................................635
IV. The Federal Student Loan Debt and the Bankruptcy Court's Standard to Discharge Them.................................................................637
A. History of the Bankruptcy Code and Treatment of Student Loans............................................638
B. The Brunner Test............................................................643
1. The First Prong..........................................................643
2. The Second Prong......................................................646
3. The Third Prong.........................................................648
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V. The Future of Federal Student Loans in Bankruptcy.....................................................................651
A. The IBR and the Three Prongs of the Brunner Test.......651
B. Out-of-Control Federal Student Loan Debt...................652
C. Bankruptcy Discharge in the Future?............................654
Conclusion................................................................................658
The year 2014 has concluded, and it was the year of regulation for for-profit schools and, at the same time, expansion for federal student loan repayment plans, especially the Income-Based Repayment (IBR) Plan.1 The year 2015 looks no different. The relationship between the regulation of for-profit schools and the expansion of federal student loan repayment plans is growing more intertwined and urgent based upon recent events.2 The liberalization of repayment plans is resulting in more constrained attitudes towards for-profit schools.3
The United States' problem with the amount of federal student loan debt, and all other forms of educational loan debt has been a looming problem for decades.4 The amount of debt that exists is slowly becoming a potentially catastrophic problem for the American economy.5 The question of what to do with the all of the federal student loan debt is one that lawmakers are avoiding because there
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are no easy answers.6 However, every year the problem is getting worse as debt increases, with no real means of repayment.7
Along with the increase of the federal student loan debt, the Bankruptcy Code also changed during the same period to increase the difficulty of discharging any kind of student loan debt, whether federally originated and insured or private.8 There have also been various repayment plans presented to extend, lower, or even negate federal student loan repayments.9 This approach, however, is just delaying the issue of dealing with the federal student loan debt problem without fixing the system, including the increasing costs of higher education. The goal of the federal government seems to be to provide any avenue to borrowers that enables them to avoid paying much of, if any, student loans without actually using the Bankruptcy Code to accomplish that result. It appears that for-profit schools are the roadblock to resolving federal student loan debt through either bankruptcy or loan forgiveness.
Coinciding with the federal student loan debt issue, the Obama Administration, the Senate's Health, Education, Labor & Pensions (HELP) Committee,10 the Consumer Financial Protection Bureau (CFPB),11 and various state attorneys general have all gone after loan servicers and for-profit colleges that have abused student loan borrowers.12 There has been increasing attention on for-profit schools
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in recent years, and 2014 provided more doubt on the once thriving industry of for-profit colleges.13 The federal government essentially shutting down Corinthian Colleges for loan fraud is just one example.14 As a result, the American public is hesitant to forgive student loans.
Additionally, in recent years, there were developments in the repayment of federal student loans. In total, there are now four variations of IBR plans.15 The implementation of IBR plans has increased scrutiny of for-profit schools. As these plans were implemented, scrutiny has increased because for-profit owners are essentially making free money off the American public. The question is whether this increased scrutiny of for-profit schools is a trend or an anomaly as the ability to repay federal student loan debt becomes more difficult. This Article argues that the increased scrutiny of for-profit schools is not an anomaly and the increased scrutiny will continue as Congress and the President confront the growing federal student loan debt problem.
The amount of federal student loan debt outstanding in America is hovering around one trillion dollars.16 At what future date will this debt become the next financial crisis?17 Just in 2010, borrowers incurred another $100 billion worth of federal student loan debt.18
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The amount of existing debt for federal student loans is higher than the amount of debt America has in automobiles or even credit cards.19 In the United States, the amount of federal student loan debt is second only to the amount of mortgage debt.20 For-profit schools and their non-profit disguises are a large factor behind these increases.21
In fact, in 2012 the amount of student loan debt was just under $1 trillion, auto loans were at $768 billion, and credit card debt stood at $674 billion.22 The gap between these types of debts is only getting wider.23 The rate of increase for student loan debt in 2012 was at a vigorous 4.6%, while the rate of increase for auto loans were 2.4% and that of credit cards were at a minuscule .3%.24 During this same period, home equity loans decreased at a 2.7% rate to $573 billion.25 In 2013, the amount of student loan debt surpassed $1 trillion.26 There is no indication that this trend is going to change or even slow down with the increased scrutiny of for-profit schools.27 The sheer amount of debt is just one issue concerning the rise of student loan debt in America.
The average debt per student-borrower is also on the rise.28 Thus, it is not just a few borrowers producing the increase in the total amount of federal student loan debt.29 From 2005 to 2012, the average student loan debt per borrower increased from $17,233 to
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$27,253.30 That is an incredible 58% increase during that period.31 This occurred during the mortgage collapse between 2008 and 2009.32 During this period, auto and credit card debt were decreasing, but federal student loan debt was skyrocketing.33 This was in part due to the boom of for-profit schools during this period.34
Simultaneously, the default rates among student borrowers increased.35 In the fall of 2012, the Department of Education (DOE) released the number of borrowers who were already in default from the late 2009 and early 2010 beginning repayment period.36 The DOE's numbers stated that 9.1% were already in default.37 That was up from 8.8% from the previous year.38 For-profit institutions actually saw a decline to 12.9% from a 15% default rate from the previous year.39 Nonetheless, the three-year default number ballooned to 13.4%.40 Nearly half of those numbers were still students from for-profit institutions, which gave for-profit institutions a 22.7% three-year default rate.41
These defaults have led to additional expenses for the federal government.42 In the last fiscal year, the DOE paid debt collection
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companies more than $1.4 billion to collect on defaulted federal student loans.43 Because most borrowers would benefit from being placed on the IBR, should the federal government put something in place that would direct or even assist borrowers with being placed on IBR plans? This would lead to a possible savings of $1.4 billion dollars.44
All of the federal government's collection efforts lead to a negative impact for the borrower's credit.45 With the amount of federal student loan debt that exists on people's credit reports,46 at what point does this debt begin to drag the economy down because people are unable to purchase homes, automobiles, and other items? Many have argued that this process has already begun.47 It is interesting to note that during the age of the bank and automotive "bail-out" a few years ago, relieving federal student loan debt was not mentioned.48 Since then, there has been some discussion of a bailout of the federal student loan problem;49 however, nothing has been formalized by the federal government.50 Imagine how much money would have been generated for the American economy or how the mortgage crisis may have been lessened if the bailout included federal student loans. However, this will never be discussed until for-profit schools are made exempt from any bailout process.
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Nonetheless, that period has passed and all...
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