Category Archives: Money & Budgeting

Federal help for ITT students: discharge of student loans

In the light of the ITT technical Institute bankruptcy, many students are left with high student loan debt and no degree.  But there may be some relief available for those who have not yet graduated. It is the purpose of this post to explore those options that the reader might benefit, or pass the information along.

Perhaps a little explanation of the student dilemma in this typical “trade school” is in order. When a school such as ITT closes, the students can’t get the associates, bachelors, and master degrees hoped for;  thus, they are deprived of the “benefit of the bargain”.

For the student, the denial is more than just denial of ego satisfaction.  He has pinned his hopes  on the earning power that degree represents for him.  He anticipates that all will benefit from his efforts.  It will be wonderful for his family.

The school has a different idea:  it is called a profit model.  The measuring stick is the bottom line.  Product quality, marketing, and management are all expenses.  The less expenses the better.  This is what benefits the bottom line.  In this line of thinking, there is no value in educating the customer to become a well informed shopper. The prospective student doesn’t need to know about education cost & education value; such a concern would just interrupt the sales process.

But back to the end result:the school closes.  Now student loan debt is owed on a college degree that won’t be obtained at this institution, and may never be obtained at all.  Without a change of circumstance, the economic power that college degree represents will never materialize.  Some students lose hope, feeling themselves further behind, with more debt and less earning power than planned.

The “Closed school Discharge” is a mechanism put in place by the federal government, to allow the student who cannot complete his degree to seek relief from the student loan burden which he must carry. The information on that federal program can be found at https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/closed-school.  The form which needs to be filled out to apply for administrative discharge can be found at:

http://www.ifap.ed.gov/dpcletters/attachments/GEN1418AttachLoanDischargeAppSchoolClosure.pdf  .

Of course, use of government websites is not always as simple as it looks.  There are certain “gotchas” in the administrative procedure, which do not allow the student who transfers his credits to another school (or has already received his degree) to seek forgiveness of his student loans.

As is true with many government programs, the “simple” process has become quite complex. The student who wants to transfer his credits to a new institution often finds most (if not all) of his credits will not transfer.  This is because of lack of accreditation for the trade school from which he is transferring.

ITT Educational Services has increasingly been the subject of state and federal investigations in recent years.  These actions have resulted often in sanctions against ITT and penalties.  Nevertheless,   the US Department of Education does not recognize the validity of their own investigations, when the student who has his diploma petitions for student loan relief .

In  essence, the Department of Education wants each student to prove that he was defrauded, that “what he got” was too expensive for the results obtained.  In short, the student must prove the price of the education far outweighed its real world earning potential.

This burden falls on the student, even though both federal and many state governments are currently investigating inadequate instruction in rogue schools taking federal student loan moies.  Many of these investigations show oversight of federal student loan lending has been lacking.  Most often, significant findings of neglect and abuse on the part of trade schools were left unwatched but then “discovered” by government agencies.

So it can be tough getting an administrative discharge.  If denied, an appeal can always be taken directly to the Department of Education.  This is where the counsel of an attorney experienced in this area can be quite useful.

If the Department of Education administrative discharge appeal is not effective, every student has access to the federal courts. The student may seek to address the student loan debt directly with the Department of Education in an “adversary complaint” in the bankruptcy courts.

Due to the fact that ITT and other schools have recently lost their entitlement to federal funds from student loans, the courts will be burdened more and more with these issues, as will the Department of Education in considering administrative discharges. At this point in time, it seems that many of the “trade schools” in all probability will be closing in the coming months.

The law on student loans is evolving, as new facts come to light about trade schools, quality of instruction, and quality of job placements.  The ITT bankruptcy does not bode well for the student who did not get the benefit of his bargain, either in quality of instruction or job placement: he will have no recourse against ITT. His only recourse will be against the federal Department of Education, a powerful adversary.

Nevertheless, it is the authors opinion that any student who has not been able to complete his degree due to school closure should apply for the administrative discharge.  If there are issues and complexities, as always seem to arise, competent legal counsel should be used to sort out the mess.

The hope of the next generation that an education will bring them to a satisfying adulthood hangs in the balance. We should not let these young folks down, and saddle them with debt which cannot be paid off.

Counting the Cost of Student Loans

checkbook-image.jpg

Unlike borrowing for housing, transportation, and cash needs, the benefit of a student loan is intangible. Although it may assist in strengthening income over time, that gradual strengthening of income is contingent upon many factors such as type of degree, finishing the degree, health, aptitude for degree specific work, ability to market oneself at a job interview, and local market demand for that skill set.  Large debt for a house or a car gives an immediate tangible result, but  large debt for college does not give one a place to sleep or means to get to work. In that sense, its value cannot be measured in the immediate present.

Normally when a consumer makes mistakes and struggles with too much debt, he can use bankruptcy to adjust his lifestyle and debt. This is not so with student loans, unless a bankruptcy “adversary complaint” is used, which may be uncertain as to result. Thus this consumer debt does not allow for mistakes!

In the worst of nightmares, the student signs on for large private loans, while attending “for profit” schools, if he does not graduate money-dice.jpgand does not advance economically due to education/skills acquired in college, this is bad news.  Without the hoped for benefits of job advancement,  the financed education can assist in creating an onerous burden of debt perhaps too heavy to carry.  Credit report damage and economic pressures can lead to lifelong financial disorientation. Obviously, one is now hampered in other investments such as buying a home, starting a business, making a career change, having children, or marriage to a spouse who chooses to stay at home with the kids.

Regardless of the fact that education is always enriching and worthwhile, the student today is wise to “count the cost”. As a rule of thumb the prospective student loan borrower must ask: “will I make enough in the 10 years after graduation to amortize (and pay off completely in level payments) the entire student loan debt at 7% interest?

To “break it on down”, $50,000 of student loan debt would pay off at $580.54 per month, twice that amount will pay off at twice that amount, 1/2 of that amount will be paid off at 1/2 that amount.  See the chart below.  The big catch is, whatever that amount is, it must be paid every month (on time) for 120 months, no exceptions.  Of course this long term commitment does not take into account job loss or underemployment, divorce, sickness of children or spouse, or one’s own health issues.

And what will it take each month to pay off that $50,000 student loan?  The math says $580.54 per month AFTER that tax man is paid. That means the aftertax dollar must be “bulked up” by 1/3, or $193.51, to $774.06 to be earned each month, so the monies can be taxed by $193.51 and the student lender can be paid $580.54.  And this plan must be steadily carried out each month, on time, for 10 years.

Loan Amount Payment Income needed/month (before taxes) Income needed/year

(before taxes)

25,000 $290.27/mo.

x 10 years

$387.03/mo.

x 10 years

$4,644.36
$50,000 $580.54/mo.

x 10 years

$774.06/mo.

x 10 years

$9,288.72
$100,000 $1,161.08/mo.

x 10 years

$1,548.12/mo.

x 10 years

$18,577.44

So one must “count the cost”.  If not, student loans are a serious dilemma, and caution is advised.

When it comes to timely payment on any financial arrangement, the ability to pay is critical.  In coming months, I will be commenting on this thorny issue of student loans and the cost of college, in the hope of shedding some light on student loan pitfalls.  Of course, I am in the business of providing practical solutions in financial matters, and I welcome your questions as we explore this topic in coming updates.

How Indiana is dealing with student loan problems

student piggy bank

In practicing law for 38 years, I have thought a lot about money, as I frequently counsel small businesses and consumers who want to make and hold onto their money. I watch incomes and debt loads rise and fall. In the economics of our country and that of many individuals, a growing concern is the dramatic increase in student loan debt over recent years.

Many students borrow to finance their education, and it can be a great benefit for them. Nevertheless, national statistics show that students who borrow to finance an education are now graduating with an average of $35,000 in student loan debt. Here in the US, this is the largest consumer debt category, other than first mortgages. It is larger than credit card debt, second mortgages, and other consumer debt. At this point in time, $1,300,000,000 is owed on student loans.

A recent article in the Indianapolis Business Journal gives us some insight into what innovative thinkers in Indiana are doing to address this growing problem. My thanks to Hayleigh Colombo for highlighting this issue in her article on the front page of the IBJ for May 9th, 2016. Many of her thoughts are echoed herein.

Credit can be given to Mitch Daniels and other serious thinkers on education policy. Purdue ((under Mitch Daniels) has frozen its tuition for a number of years. The student who enrolls for the 2017–18 academic year will pay $10,002 per year, just as he would have paid in the year 2012. This is good news for Indiana students.

Indiana University also understands the problem. IU now sends letters to all student loan borrowers regarding their future monthly loan payment, cautioning them about excess borrowing. This is also good news.

The reason for the concern here in Indiana is obvious. Student loan debt has been rising steadily in past years, as US Department of Education statistics show.

Indiana has not fared well in paying off its student loan debt. At this point in time, Indiana ranks 4th highest among states in student loan defaults. 14.7% of Indiana students who have graduated and are scheduled to pay their loans currently are defaulting, within three years or less.

Debt is used to finance a college education on a very broad basis, with 46% of the freshman at Indiana public universities financing college with student loan debt. On the bright side, both Purdue and IU main campuses have reduced to 36% the number of first year students taking out student loan debt, from a high in 2008 of 41-42% of first year students taking out student loan debt. Thus it seems that more Indiana college students at these institutions are becoming aware of the dangers of financing college.

Another practical step being taken here in Indiana is the use of “banded tuition”. This allows a “package price” for up to 18 credit hours, where the student is enrolled full-time (12 credit hours or more). Despite the obvious advantages, a troublesome report by the Indiana Commission for Higher Education mentions that approximately half of college students take enough credit to graduate on time, but 75% of them expect to graduate on time.
If we assume 120 hours of credit to graduate, the eager and penurious student can take six semesters (including summer school) of 18 hours, plus one more semester of 12 hours, and she can earn a degree in two years and four months. In other words, seven semesters of tuition could be paid, instead of eight semesters.

Further, the student can be out in less than three years, if she chooses to devote extensive time to her education, with few sideline interests to distract her in that period of time. For the student living with the relatives, this can be a way to keep expenses down while on the “educational fast track”. Of course, this can also mean less borrowing for living expenses.

The main problem with student loans is shown in the high default rates: often the payment, which the student has not calculated in his younger and tender years is not affordable in the first 10 years when he enters the workforce. Sometimes, due to unforeseen circumstances, it is not affordable during his entire work history.

In future blog posts, we will examine what to do with the “unaffordable” student loan.

Financing Issues and Workouts

One of the most common causes for failure in a small business is a lack of capitalization. Businesses often start up with too little cash. Over time, this lack of money becomes amplified, and ultimately those businesses fail. The reason why they fail is not that they don’t have a good product, lack integrity in the marketplace, or fail to perform. They fail simply because they have run out of cash, in the middle of a normal learning curve in servicing the marketplace. Of course, loans can be helpful, but they do not replace a good business model, which allows for mistakes along the way and sufficient time to perfect your business approach.

Even without the luxury of borrowed funds, entrepreneurs feel much stress once cash flow problems arise. It’s hard to pay loans, salaries, utilities, and all the other bills that become due. The pressure increases. Whether there are loans or not, the bills must be paid, and relatives, credit card lenders, and banks are insistent. Frequently, the issue becomes the “burn rate”. In other words, “how long can a business hold on?”

Often the bank or lender have no idea what their financial problems are: sound projections and presentation of a good business plan can do much to assist with the renegotiation of debt. In any event, when default on the loan occurs everyone loses. Neithe the bank nor the borrower obtain anything from insolvency proceedings.

For this reason, our office seeks to help entrepreneurs with planning procedures, before cash flow problems arise. Nevertheless, when these crises do arise, sound counsel is necessary to navigate the dangerous waters of default and reassure the bank that the storm can be weathered.

Sometimes assets need to be sold, lines of business need to be assessed for profitability, and real estate mortgages or personal guarantees need to be added to strengthen security of outstanding loans. Nevertheless, if the entrepreneur believes his value proposition is sound, he is wise to “bet the farm” on his expertise, and continue to plow ahead. In these cases, reassuring the bank, returning liquidity to the business model, and moving toward profitability is an immediate necessity many lawyers lack this kind of business experience, and cannot be of help in this area of business. When faced with the task, most human beings like easy work. Negotiation of loans can be hard work.

I still remember the entrepreneur who came to me to explain his business was not profitable, and he didn’t need the large amount of warehouse space that was under lease. In addition, he was in danger of defaulting on the lease, and having the goods warehoused subject to a landlord’s lien. While exploring his options, he realized as we talked that a competitor (who was a dear friend) might be willing to give him storage space, and even assist him with expanded lines of credit. Since moving his location he is much happier, and profitable too!

In another case the individual owned the real estate from which his business operated. By selling the real estate he was able to become current with suppliers, giving him enough time to sell additional customers, enhancing his profitability. Further, the cash received from selling the real estate allowed him to progress forward without financial worries.

Of course, there are a myriad number of options that a good business lawyer helps his clients explore every day. As a small business owner myself, I believe that the key is flexibility. When we listen to our clients, their needs can best be served by applying our experience to assist them in creating satisfactory legal results.

If you are in need of this kind of help, please do not hesitate to give us a call for a candid opinion as to whether we can help in your situation. We would be more than pleased to be of assistance to you. Call us today at (317) 266-8888. As an alternative, you can email me personally at any time: mike@mikenorrislaw.com.