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The Student DebtCropper System: Even the Destitute Hounded by Debt Collectors

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As most people who have passing familiarity with student debt in the US know, it’s a millstone that is brutally difficult to remove. But it turns out that even the limited ways out are often not available in practice thanks to the hyper-aggressive conduct of a critical government contractor.

Unlike every other type of obligation save child support and criminal penalties, it can’t be discharged in bankruptcy. The lone type of exception is “undue hardship”: when a borrower is so clearly incapable of ever paying that it’s ridiculous to keep pressing them for the money.

The undue hardship standard is very difficult to meet, so one would think given how stringent it is, and therefore the comparatively small number of cases that are involved, that the student debt collectors would accept this minuscule level of losses and focus their resources on people with means.

But it instead seems that the debt police are unable to contain themselves. A New York Times story discusses bankruptcy court abuses by the organization that is the main contractor to the Department of Education on these cases, the Educational Credit Management Corporation:

A review of hundreds of pages of court documents as well as interviews with consumer advocates, experts and bankruptcy lawyers suggest that Educational Credit’s pursuit of student borrowers has veered more than occasionally into dubious terrain. A law professor and critic of Educational Credit, Rafael Pardo of Emory University, estimates that the agency oversteps in dozens of cases per year.

Others have also been highly critical.

A panel of bankruptcy appeal judges in 2012 denounced what it called Educational Credit’s “waste of judicial resources,” and said that the agency’s collection activities “constituted an abuse of the bankruptcy process and defiance of the court’s authority.”

For a group of bankruptcy appeal judges to make a public statement of this sort is extremely unusual and strong evidence that the critics are on solid ground. The Times starts with a case of Stacy Jorgensen who had $43,000 of student debt as well as large medical bills due to fighting pancreatic cancer. When she filed for bankruptcy, Educational Credit’s position was tantamount to that she had to be a terminal case before any relief was warranted:

“The mere possibility of recurrence is not enough,” a lawyer representing the agency said. “Survival rates for younger patients tend to be higher,” another wrote, citing a study presented in court.

Mind you, Educational Credit’s position was that Jorgenson should not get any sort of break.

This sort of case, where creditors continue to pursue borrowers who’ve discharged their debt in bankruptcy, is sadly familiar to bankruptcy attorneys when the borrower is fighting to keep their home. But what makes this case egregious that the debt had actually been repaid, yet Educational Credit kept trying to defy the court:

The case that caused the bankruptcy judges to accuse the agency of abuse concerned Barbara Hann, who took a particularly drawn-out beating from Educational Credit. In 2004, when Ms. Hann filed for bankruptcy, Educational Credit claimed that she owed over $50,000 in outstanding debt. In a hearing that Educational Credit did not attend, Ms. Hann provided ample evidence that she had, in fact, already repaid her student loans in full.

But when her bankruptcy case ended in 2010, Educational Credit began hounding Ms. Hann anew, and, on behalf of the government, garnished her Social Security — all to repay a loan that she had long since paid off.

When Ms. Hann took the issue to a New Hampshire court, the judge sanctioned Educational Credit, citing the lawyers’ “violation of the Bankruptcy Code’s discharge injunction.”

Educational Credit went on to appeal the sanctions twice, earning a reprimand from Judge Norman H. Stahl of the United States Court of Appeals for the First Circuit, who agreed with the bankruptcy judges that the agency “had abused the bankruptcy process.”

Asked for comment, Educational Credit responded that the case was not related to undue hardship and that it was based on “complicated issues of legal procedure.”

The “take no prisoners” approach of Educational Credit is an overreaction to the failure to make much of any debt collection efforts for student loans, resulting in the failure of the largest student loan guarantor in the early 1990s. Congress stepped in and gave student lenders what amounts to senior standing, allowing them eve to garnish Social Security payments. But Educational Credit has also helped to push the envelope:

One of the places where Educational Credit has had the biggest impact has been to shape the meaning of the phrase “undue hardship,” the standard required since the 1970s for relief from student debt. In 2009, for example, the agency persuaded the United States Court of Appeals for the Eighth Circuit to adopt stricter standards. One argument it made was that if student borrowers seeking bankruptcy could qualify for a repayment plan tied to their incomes they were, by definition, ineligible for relief.

The dissenting judge, Kermit E. Bye, said the decision “improperly limits the inherent discretion afforded to bankruptcy judges when evaluating requests” for relief. He also said the new standards subjected debtors to a higher burden of proof than was actually required by law.

Even if this sort of coverage leads to restrictions on debt collection as a sadistic extreme sport, it will provide relief only to the most distressed student debtors. Sadly, the laws on the books allow for plenty of leeching of student lenders without breaking them on the rack.

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47 comments

    1. Benedict@Large

      Debtors’ prison is easy. A fine gets levied by the court which the defendant cannot pay. The court can’t jail the defendant directly for this, but it can repeatedly call the defendant back into court to ask for the payment. Eventually the defendant will miss an appearance, and the warrant for incarceration is issued.

  1. David Lentini

    What do people expect from speculators? If you allow complete default or discharge at a lower return for the lenders, then the speculative value of the business will collapse. Collapse will lead to shareholder losses and even a ripple effect throughout the financial community, given the huge size of this market. So, our most powerful institutions must instead crush human beings to avoid institutional collapse and instituting limits on power.

    1. taunger

      The federal government has issued nearly 100% of student loans since 2010, and has purchased a significant portion of loans originated prior to that.

      Of course, this information may affect your analysis regarding lender profit, or it may not; which is worse?

        1. Dagardix

          You can look at the CFPB, for one; or, Wikipedia….

          Congress eliminated the Federal Family Education Loan program in 2010–which subsidized interest payments and guaranteed principal on loans made by private lenders. When that ended, most banks (not all) got out; all new Stafford loans have since been made through the federal direct loan program.

          Consequently, the government is making huge profits (third largest in 2012, after Exxon and Apple).

          CFPB and US PIRG have shown that banks and lenders have shifted over managing the disbursement system for federal financial aid (through pre-paid and debit cards, and new accounts, which they’re using in egregious rentier fashion for an alphabet soup of fees). Higher One and Sallie Mae have the lions share of the market, but it’s still growing.

  2. j gibbs

    Student debt is perhaps the terminal phase of absentee ownership. There would seem to be nothing left for the bankers to capitalize in their stampede to get something for nothing. For the young of today the only alternative would appear to be eschewing college and pursuing independent learning. You will miss the football games and the beer guzzling and the easy recreational sex, but the only material loss will be in credentials providing opportunity to join the corporate looters and the academic foozlers and the network yappers in the great game of worker immiseration. Surely those who are smart enough to benefit from college are capable of something else, right? If enough people try it we might even get some meaningful change in a few hundred years.

  3. DakotabornKansan

    “If history shows anything, it is that there’s no better way to justify relations founded on violence, to make such relations seem moral, than by reframing them in the language of debt—above all, because it immediately makes it seem that it’s the victim who’s doing something wrong.” – David Graeber, Debt: The First 5,000 Years

    Debt collection as a sadistic extreme sport…

    “It is forbidden to kill; therefore all murderers are punished unless they kill in large numbers and to the sound of trumpets.” – Voltaire

    The “take no prisoners” approach…

    “Debt is an ingenious substitute for the chain and whip of the slavedriver.” – Ambrose Bierce

    The case of the individual with student debt as well as large medical bills due to pancreatic cancer…

    The infliction of cruelty with a good conscience is a delight to moralists…

    “I’ll have my bond. Speak not against my bond.” – Shylock, The Merchant of Venice, Shakespeare

    The undue hardship standard…

    “As it turns out, we don’t “all” have to pay our debts. Only some of us do.” – David Graeber, Debt: The First 5,000 Years

    The double standards in the politics of debt … corporations use bankruptcy to walk away from debts; the banksters receive bail outs in their role as debtors and protection as creditors, and they are usually in line ahead of pensioners in a bankruptcy proceedings…

    But not students…

    Robert Kuttner, Debtors’ Prison: The Politics of Austerity Versus Possibility, derived his title from the story of Daniel Defoe, author of Robinson Crusoe. Defoe, after being imprisoned for unpaid debts, argued that imprisonment was counterproductive. It made it impossible for debtors to not only pay off debt but to also be productive members of society.

    “Debtors’ prisons have mostly been abolished, but the mentality lives on,” writes Kuttner.

    “I never wonder to see men wicked, but I often wonder to see them not ashamed.” – Jonathan Swift

  4. plantman

    So what is the remedy here?
    Amnesty?
    I keep hoping someone will start an “amnesty for student loans” campaign, but so far, nothing seems to have caught on. I can’t understand why, given that this is an issue which galvanizes an entire generation.

    You thoughts, Yves?

    1. Cocomaan

      Paying your debts is still seen as an inviolate part of the human condition.

      There hasn’t really been amnesty for homeowners, either.

    2. taunger

      There since 2009, Federal loan programs include debt forgiveness for 120 on-time payments calculated on a sliding scale if the borrower is employed in certain sectors (government, education, healthcare, public interest law). Borrowers on an income based repayment plan may have their debt forgiven after 20-25 years.

      These are clearly not particularly good options, especially given the number of young borrowers with student loan debt in the same range past generations would have accumulated as first time homebuyers.

      However, there has been campaign activity from MoveOn, Young Invincibles, and consumer organizations as well, like USPIRG and National Consumer Law Center. There were multiple legislative filiings in 2013 on the issue.

      But that fact is, the current programs are probably the best we will get without a major legislative overhaul targeting inequality in the economy, including tax reform, real lending reform (both structure and substance), etc.

    3. JTFaraday

      I think Lawrence Weschler, then Director of the NY Institute of Humanities which is affiliated with NYU, suggested just such a project at a symposium he hosted on Occupy Wall Street in February 2011:

      http://nyihumanities.org/event/the-winter-of-our-discontent

      And then a few months later, suspiciously lost his job! Coincidence?

      http://chronicle.com/article/New-York-Institute-for-the/134768/

      A (mere sampling of) NYU’s adventures in the student loan department, in support of this extraordinary conspiracy theory:

      http://wallstreetonparade.com/2013/09/the-untold-story-of-citibank%E2%80%99s-student-loan-deals-at-nyu/

      Seriously, don’t even joke about it people. The Yakuza will take you out.

  5. Capo Regime

    This is part and parcel of a mentality my brother a recovering family law attorney desribed years ago. While technically a person can get his child support modified downward in case of unemployment or reduced earnings it is practically impossible to do so (especially for downwardly mobile “professionals”.). First need to get a lawyer then get on court calendar and of course after several months hearing comes up and being unemployed fall behind on payments and then become a deadbeat. When judge hears case the “deadbeat” is told to work harder to meet his obligation…..ex wife, live in boyfriend all happy. But the kicker is that judges will often “impute” income, so even if you are unemployed or are earning 20k as a barrista the fact that you once earned 90k as say a mortgage broker forms the basis of your obligation and not your current and likely future reality. Downward adjustments almost impossibe to obtain. But seriously, this illustrates a mentality of total cruelty and service to an abstract idea and not real human life.

    1. Jim Haygood

      Not only all that … but most states now punitively suspend the drivers licenses and professional licenses of those who fall behind on child support.

      Depriving a parent of transportation and the ability to work in their profession means they fall hopelessly behind, then eventually go to jail where they can’t earn anything at all.

      What a brilliantly conceived system! (at least from the POV of family lawyers, the hack judiciary, and the Gulag).

      1. taunger

        Except that the hack judiciary has (comparatively) little to no influence on the legislature that passes such laws and the family lawyers probably split on whether or not to like them (if they are at least half-way decent people and or business savvy). Maybe the Gulag gets in on the action.

        Far more its identity politics (ie women’s rights) than anything else at play here. Not an easy place to make sweeping generalizations.

      2. Martin Finnucane

        In my state, drivers’ licenses can be suspended for misdemeanor pot possession, as well as for contempt of a child support order. So sexual activity and smoking MJ both lead to driving with a suspended license. Every traffic stop becomes an arrest situation, with the requisite warrantless search of the vehicle. At the same time, there are very few towns here in which somebody without a car can live comfortably – much less remain gainfully employed. And then probation itself, whether for a DWSL or MJ conviction, presents ample opportunity to fail, leading to a “partial revocation” or “revocation in full” – meaning at least 15 days in jail, meaning kiss the job goodbye, if you’re lucky enough to still have one. You have a right to a hearing on the revocation, which hearing doesn’t come along until you’ve been fired anyway, and which is in front a judge who probably started his or her career in the DA’s office, and who is deciding your case on a preponderance of evidence standard. And whatever the outcome, if your boss decides to fire you even on a whim, you have no substantive rights of recourse, given that this is a “right to work” state with very low rates of unionization.

        Conclusion: the twin system of child support enforcement and misdemeanor criminal justice, at least around here, is pretty well designed to extract young people – principally but not entirely young men of color – out of the formal labor force.

        1. Jagger

          …out of the formal labor force and into the for profit prison and legal system. Follow the money and the insanity.

        1. GRP

          Sterilise them (as well as the mothers of the chldren), the state pick up the child support costs and recover the costs with interest from the deadbeat dads if they happen to make money in the future.

  6. F. Beard

    All debts to a government-backed credit cartel are by definition onerous since the existence of such a cartel drives people into debt.

    By now, nearly all US families should have enough equity and/or wages to pay for education and other necessities without borrowing.

    1. j gibbs

      Of course, you are right about this. How it works is: the banks create new loans to recapitalize all existing assets; the loan proceeds are spent driving up prices in competition with existing money. Thus, those not in a position to create money find their money diluted steadily, particularly in our brave new world of zero interest. In consequence, working families develop no equity over time. If they are lucky the exist above subsistence levels. Otherwise, not.

  7. Roxster

    If student loans become easier to discharge in bankruptcy then the interest rates on them will go up. There is no free lunch.

    1. F. Beard

      Bankers eat free lunches all the time. Their business model is to rent stolen purchasing power to the so-called creditworthy.

      Plus, there is such a thing as the prevention of the destruction of lunches already paid for by deflation.

    2. Ben Johannson

      Actually the government can set rates as low as it wants, although there is no good reason to charge interest on a government a provided education loan. The best way to deal with your concern is to abolish interest charges.

      1. NotTimothyGeithner

        Or abolish education loans all together. If education is so wonderful, why aren’t the neo-liberals pushing to make it free? We know the answer. They are crooks, but why set your sights so low on interests? Loans for education are absurd. Education has been free in other civilizations in the past, and considering the 0 cost of information today, education prices should be much cheaper.

  8. randallr

    This is so wrong. There are 10s of millions of us and only a few of them. We just need to get organized and get our people into the streets for protests and even civil disobedience if that’s what it will take for action.

    I’m so tired of watching the top make out while ordinary people are forced to suffer abuse, in this case by an agent of the federal government. It’s depressing. Somebody remind me: why are millennials voting Democrat again?

    1. randallr

      Meet Professor Rafeal Pardo. The NY Times quotes him. Wish we had more like him.

      www (DOTT) law (DOTT) emory.edu/faculty/faculty-profiles/rafael-pardo.html

    2. NotTimothyGeithner

      As to young people, U.S. history classes stop at World War II. From a public education perspective, kids are taught about FDR and hear tributes about JFK which gloss over defense spending increases, his questionable civil rights record, RFK’s McCarthyism, and slashing taxes on the wealthy. What else would they know?

      This pretty much describes 90% of people, but the millennials saw the incompetence of W. when they first started to pay attention or suffer direct effects. The other issue is the media and even the Democratic messaging machine were filled with stories about the wonders of the Clinton economy. Since U.S. history ends with FDR, wouldn’t young people conclude Bill Clinton and FDR are one in the same? Very few people tell them differently.

      Then they have to deal with charlatans and frauds who project an aura of being better than the GOP which is very ugly, so until they hear more about what frauds the Democrats have become they will conclude the Democrats and liberal/progressive/lefty/not stealing from poor peopleism are one and the same.

      1. NotTimothyGeithner

        To be fair, most Americans don’t live a day trip from another country, and when they do its Mexico and Canada which are fairly similar to where they live. Two, America doesn’t receive a massive influx of foreign Hollywoods.

        Many countries have these advantages. Combined with poverty, its not like many Americans get to go to another continent, and lets be honest, being the au pair for a Chinese stock trader isn’t a career move for the college educated.

    1. Dennis Redmond

      Oh, it’s happening. Some of the best and the brightest people I track in the US digital media, the below-the-radar innovators, are already gone. Personally, I want to stay and fight the neoliberal bankster thieves who are destroying my country. But I cannot repay my $210,000 of student loans (accumulating at 7% while Vampire Squid pays 0.25%) on my microscopic annual salary as an adjunct with three advanced degrees. The plan is, I’ll try to land something for a couple more years. But if nothing serious turns up, then it’s goodbye to the Land of Debt Slavery. I should note that I have two incomparable advantages that most other debt-slaves don’t have: (1) I already have a potential safe harbor in mind, and (2) my field – videogame culture and digital media critique – is transnational by definition, so I can be productive wherever there’s a halfway decent internet connection.

  9. Publius Democritus

    Good lord, people. There is, indeed, a solution:
    If you have any skills whatsoever to offer, and if you are young enough to be able to contribute, emigrate!
    The USA is a failed state. Even if you are not being crushed by student debt, you should emigrate. In almost every measure of human development, the USA is at the bottom of the group of “developed,” western nations. Why would you want to stay, other than the fact that you are afraid of change?
    If you can’t emigrate, do an inner emigration: find someone who will rent you some land under the table, and grow things. Work as a handyman under the table. Get out of the tracked economy. They can’t garnish what they can’t find.

    Whatever you do, don’t commit literal or economic suicide by pretending you are obligated to fulfill a fraudulent contract: a useless education for a lifetime of debt.
    Egads, people. Get out while you still can.

    1. diptherio

      Let me get this straight: a bunch of d-bags in Washington and New York have royally screwed things up and so now I’m supposed to leave my family, friends and home? Being young doesn’t make that any better of an option.

      No, if we emigrate, we’re ceding the battlefield to the enemy. I say stay where you are and avoid and ignore the b@$tards as much as possible.

      1. NotTimothyGeithner

        Oh no, you could immigrate to smog infest Beijing or compete in Europe where only some countries have 50% youth unemployment. Don’t be like the unthinking sheeple with hideous amounts of student debt and no money who don’t make a choice to get a job in another country! Its just so easy.

    2. rusti

      As someone who DID emigrate out of the US, this still seems like a silly suggestion to me.

      In debt? Abandon everything you’ve ever known!

      Where should people go? Times are tough all over the world. Someone who doesn’t have highly desired skills (and local language skills) isn’t going to have an easy time getting visa sponsorship in another advanced economy, and even then I doubt daily life is that much less degrading than being heavily indebted in your own country as you learn the ropes of the new place. Frankly, the people who can emigrate without too much trouble are the ones who are least likely to need to emigrate to begin with.

  10. Ray Phenicie

    I have mentioned before the sad tale of a close friend who is hounded by debt collectors; his debt is not a student loan. However, the methods are as draconian if not more so. The tactic that stands out is that of stalking; collectors wait in their cars near his front door on a daily basis and follow him to work, they arrive at social gatherings, hanging around and tailing him for several miles as he drives home.

    1. Sy Krass

      He can make that as entertaining as possible, introduce them at parties as his friends, take pictures of them, carry a sign around saying Im being stalked by these a-holes.

  11. Podargus

    Simple and effective solution – As education is a public good it should be free – kindy through university. No fees,no loans,no sweat.

  12. Cassiodorus

    Can’t a lot of these folks get forbearances? Oh sure, the value of the loan skyrockets out of sight, but when you’re dead you no longer have to pay.

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