Propping Up a High-Price Model of Higher Education: In re Pratola

By Donald L. Swanson

The U.S. Government continues to prop up a high-price model of higher education, forcing students to bear the brunt of such foolishness!

News reports are filled these days with student loan crisis stories. We hear how:

–“the number of Americans severely behind on payments on federal student loans reached roughly 4.6 million . . . doubling from four years ago”;

–“rising defaults on student loans” are hurting “home ownership rates”;

–delinquency rates on student loans “are much higher” than delinquency rates “on auto loan and mortgages”; and

–“U.S. student loan debt now equals the size of the $1.3 trillion U.S. high-yield corporate bond market.”

And get this:

1. Delinquency rates on student loans are high because of “loose student loan underwriting standards”; and

2. The “substantial majority of student loan default risk is borne by the U.S. Treasury.”

A Translation

Here’s my translation of the last two points. When granting a student loan, the lender does not ask any of the following basic questions as a meaningful part of the “should we make this loan” inquiry:

–“Is this tuition, room and board bill excessive?”

–“Will the student be able to repay the loan?”

–“Can anyone provide collateral for the loan?”

–“What will happen to this student, if the loan cannot be repaid within a few years after graduation?”

Instead, lenders often make student loans on the strength of this single proposition and without further inquiry:

–the U.S. Government guarantees its repayment.

The U.S. Government

So . . . that brings us to the U.S. Government: what does it think it’s doing?!

Shouldn’t the U.S. Government be demanding a satisfactory answer to each of the loan-granting questions posed above before providing a guaranty of a student loan?

–The answer is, of course, “Yes.” But it doesn’t and it won’t.

Instead, the U.S. Government relies upon this strategy for assuring repayment of the student loans it guarantees:

–The student loan can almost-never be discharged in bankruptcy.

And that’s a terrible strategy!!!

Foolish Tactics

As a result, the U.S. Government has a number of tactics to provide debt relief, all of which are inadequate. “Inadequate” is, actually, the wrong word: the tactics are foolish. For example:

1. Monthly payment amounts can be reduced, using a formula based on debtor’s income. The problem is that such payment amounts are often less than interest accruals, so the total indebtedness amount is actually increasing after each monthly payment, rather than going down. This is foolishness!!

2. A debtor might work for a governmental entity or non-profit for a long period of time and, thereby, earn a forgiveness of student loan indebtedness. The problem is that rules for this tactic are unclear and can change without notice after a long period of reliance by the debtor. This is also foolishness!!

A Problem

The numbers of people and debt amounts involved in the student loan crisis are now huge. The result is that the U.S. Government will, ultimately, have to start forgiving a bunch of student loan debt. But the ramifications of a forgiveness approach will be significant. For example:

–What about the student who exercised restraint and prudence in choosing an affordable college and made sacrifices to pay the student loan debts?

–What about the student who spent borrowed money on a high-price college and lived extravagantly?

–What if high-price colleges continue charging high prices and easy student loans continue being made?

An Example of the Problem

Here’s a latest example of the problem:  In re Pratola, Case No. 17-11668 (Bankr. N.D. Ill., December 27, 2017).

 –The Facts

In re Pratola is a Chapter 13 case where Debtor’s student loans total $568,671 (yes, that’s north of a half-million dollars!!!).  Other debts are on credit cards totaling $22,552.

Debtor earned an undergraduate degree in “interdisciplinary studies” at Arizona State University and a graduate degree in “cinema and television production” at University of Southern California.  Annual costs of attendance (room, board, fees, etc.) published online by these two colleges are:

–Arizona State undergraduate–$27,530 resident, $44,110 non-resident

–USC graduate–$78,135.

Since graduation, Debtor has been employed as a “Genius” by Apple and earned between $39,000 and $44,000 per year.  At bankruptcy filing, Debtor was making income-based payments on student loans of $268 per month.  [Note:  interest-only payments on $568,671 at 5% per annum would be $2,369.46 per month.]

How can this happen?  How can any lender possibly make loans like this?!!

–The Legal Issue

11 U.S.C. § 109(e) limits Chapter 13 eligibility to individuals with “unsecured debts that aggregate less than $394,725.”  And 11 U.S.C. § 1307(c) provides for dismissal of a chapter 13 case “for cause.”

So, the primary question in Pratola is, “whether § 1307(c) requires the Court to dismiss” Debtor’s Chapter 13 case because education debts exceed the Chapter 13 debt limit.

If I were asked, in advance of the Pratola ruling, to predict its outcome, I’d have said, without hesitation or reservation, that the case could not stay in Chapter 13 because of the debt limit problem.  But I would have been wrong!

–The Ruling and Its Rationale

Instead, the Court rules that “§ 1307(c) does not require the Court to dismiss a case if the inclusion of educational debt causes a debtor to exceed” Chapter 13 eligibility limits.  This ruling is a surprise—and a bit of a stretch!

The Bankruptcy Court’s  rationale is that statutory language, legislative history and changes in the student lending environment preclude a finding of “cause” for dismissal in such circumstances.

–The Appeal

This Pratola ruling is, of course, on appeal, with an initial status conference set by the appellate Court (the U.S. District Court for the Northern District of Illinois, at Case No. 18-cv-00213) for February 22, 2018: can’t wait to see what the appellate courts do with it.

A Solution

The beginning of a solution for the student loan crisis is to stop funding high-price education through student loans.

This solution will never happen because of the economic needs and political demands of high-price colleges–and even of low- to mid-price colleges. But it would begin to address the heart of the problem.

Conclusion

The student loan problem is out of control.  And it’s getting worse — not better.  High-price models of higher education continue without abatement.  Student loans continue to be made, and to be guaranteed by the U.S. Treasury, as if there is no problem.  And students continue to be the ones bearing the brunt and burden of unreasonable and unrealistic student loan obligations.

This easy-student-loans for high-price education has to stop!  Truly, it does — for the benefit of our students and for the benefit of the U.S. taxpayers.  But it won’t.  And the foolish lending policies continue on.

This is troubling, indeed!

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