January 11, 2014
Loan Monitor Is Accused of Ruthless Tactics on Student Debt
Stacy Jorgensen fought her way through pancreatic cancer. But her struggle was just beginning.
Before she became ill, Ms. Jorgensen took out $43,000 in student loans. As her payments piled up along with medical bills, she took the unusual step of filing for bankruptcy, requiring legal proof of “undue hardship.”
The agency charged with monitoring such bankruptcy declarations, a nonprofit with an exclusive government agreement, argued that Ms. Jorgensen did not qualify and should pay in full, dismissing her concerns about the cancer’s return.
“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.
There is $1 trillion in federal student debt today, and the possibility of default on those taxpayer-backed loans poses an acute risk to the economy’s recovery. Congress, faced with troubling default rates in the past, has made it especially hard for borrowers to get bankruptcy relief for student loans, and so only some hundreds try every year. And while there has been attention to aggressive student debt collectors hired by the federal government, the organization pursuing Ms. Jorgensen does something else: it brings legal challenges to those few who are desperate enough to seek bankruptcy relief.
That organization is the Educational Credit Management Corporation, which, since its founding in Minnesota nearly two decades ago, has been the main private entity hired by the Department of Education to fight student debtors who file for bankruptcy on federal loans.
Founded in 1994, just after the largest agency backstopping federal student loans collapsed, Educational Credit is now facing concerns that its tactics have grown ruthless. 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.”
Representative Steve Cohen, a Tennessee Democrat who has introduced a bill to limit predatory tactics, said, “The government should hold its agents to the highest standards, and I don’t know that we’ve been doing that.”
He added that the government has a special responsibility to use “a standard that’s reasonable.”
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.”
Another case dating from 2012 involved Karen Lynn Schaffer, 54, who took out a loan for her son to attend college. Her husband, Ronney, had a steady job at the time.
But Mr. Schaffer’s hepatitis C began to flare up, and he was found to have diabetes and liver cancer. He became bedridden and could no longer work.
Ms. Schaffer said she did her best to cut expenses. She began charging her adult son rent, got loan modifications for her mortgages and cut back on watering the yard and washing clothes to save on utilities. She woke up at 4 every morning to take care of her husband before leaving for a full day at a security job.
But Educational Credit said Ms. Schaffer was spending too much on food by dining out. According to Ms. Schaffer, that was a reference to the $12 she spent at McDonald’s. She and Mr. Schaffer normally split a “value meal,” a small sandwich and fries.
“I was taking care of Ron and working a full-time job, so lots of times I didn’t have time to fix dinner, or I was just too darn tired,” Ms. Schaffer said in an interview. The lawyers also suggested she should charge her son for using their car, require him to pay more in rent and rent out the other room in their house.
Asked for comment, Educational Credit said that Ms. Schaffer “did not meet the legal standard for undue hardship,” and that she declined an income-based payment plan. Her lawyer argued that the plan would treat any forgiven loans as taxable income at the end of the repayment period so it was not a viable option.
Supporters of the agency’s tactics say they are necessary to hold borrowers accountable. “For every dollar that the aggressive debt-collection firm fails to recoup, that’s a dollar that someone else is going to have to pay,” said G. Marcus Cole, a law professor at Stanford University.
Professor Cole added that if it were easy to discharge student loans in bankruptcy, lenders would simply not lend money to students without clear assets or prospects. “We need a standard like that to be able to allow students who can’t afford an education to be able to borrow,” he said.
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The Educational Credit Management Corporation is the product of a scandal that almost brought down the government’s student loan program two decades ago. In 1990, the Higher Education Assistance Foundation, the nation’s largest student loan guarantee agency for federal loans, announced that it had become insolvent, evidence that no one was paying very close attention to where student loans went, and whether they were ever paid off.
“The high default rates had a particularly high impact with the press,” said Frank Holleman, deputy secretary of education at the time.
Lawmakers began arming the Department of Education with a set of unprecedented collection tools, including the ability to garnish debtors’ wages and Social Security, and appropriate their tax rebates.
The changes helped cut default rates from a high of 22 percent in 1990 to around 10 percent in the 2011 fiscal year.
But critics of Educational Credit said it had stepped over a line between legitimate efforts to collect on defaulted loans and legal harassment.
“We should be outraged when a student-loan creditor like E.C.M.C. can use bulldog tactics to scare away someone who has a legitimate claim for relief,” said Professor Pardo, who has analyzed hundreds of adversary proceedings involving the nonprofit. “Part of the outrage is that ultimately E.C.M.C. is defending the federal government’s interest.”
Professor Pardo called the agency’s tactics a “war of attrition, death by a thousand cuts.”
Asked to respond, Educational Credit issued a statement saying that its practices strictly follow federal law and that it strives to avoid lengthy court proceedings by working with borrowers to help them apply for income-based repayment plans. When appropriate, it said it “consents to a discharge as an undue hardship.” It acknowledged that some cases are “close calls.”
Chris Greene, a spokesman for the Department of Education, said that the department offers flexible repayment options and believes that Educational Credit complies with the law and government policies. He said that if there was evidence of wrongdoing, the department would investigate.
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.
These and other changes have been regretted by others as well.
“We thought we were doing God’s work,” said David A. Longanecker, a former Department of Education official, referring to efforts to strengthen collection. “We didn’t realize the full extent to which our actions would lead to some activities that would be unfair to borrowers.”
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