Study: Student Loan System Presents Repayment Challenges

Study: Student Loan System Presents Repayment Challenges

ABI Bankruptcy Brief

November 7, 2019

ABI Bankruptcy Brief

Study: Student Loan System Presents Repayment Challenges

The Pew Charitable Trusts commissioned the Trellis Company, a Texas-based organization that acts as a guarantor for the Federal Family Education Loan (FFEL) program, to conduct an analysis of almost 400,000 borrowers in that state during the five-year period beginning when their student loans entered repayment anytime between October 2007 and September 2011, according to a press release. Based on the repayment activity and outcomes over those five years, the researchers divided borrowers into three main groups: those who had defaulted, those who owed more than their original balances, and those who owed less than their original balances. This analysis concentrates on Texas, rather than the nation as a whole, because Trellis has a rich administrative dataset and similarly robust data were not available at the national level. However, researchers supplemented the Trellis data with structured interviews with borrowers from the dataset and benchmarked this state-focused analysis with nationally representative data to ensure that the Texas findings were generally reflective of what is known at the national level and to create a more complete picture of borrower behavior. Some of the key findings were:

- Approximately a quarter of borrowers defaulted within five years of entering repayment.
- Those who owed more than their original balances after five years in repayment — 21 percent of borrowers — had frequently missed and paused payments.
- Almost half of borrowers had paid down some principal after five years. However, only 22 percent of borrowers never missed or paused payments.

Click here to read more about the research.

Is there too much emphasis on reducing student loan debt, including through bankruptcy, and not enough about the real causes of skyrocketing college costs? Don't miss Inez Feltscher Stepman of the Independent Women's Forum tackling these issues at her ABI Talk at the Winter Leadership Conference.

Rates on WLC go up after tomorrow! Don't miss your chance to earn 10+ hours of CLE, hear 70 thought leaders speaking on engaging panels and many opportunities to network. Register here.

Lawmakers to Introduce Legislation to Establish Cap on High-Cost Loans

The U.S. military realized some years ago that a lot of service members were getting into serious trouble with payday and other loans with annual interest rates of 300 percent or higher. In 2006, President George W. Bush signed into law a measure that caps interest rates to protect active duty troops. Now, some members of Congress want to expand those safeguards to cover all Americans, according to an NPR report. "We're going to expand it to the rest of the country," says Rep. Glenn Grothman (R-Wis.). He's joining four Democrats who will be introducing House and Senate versions of the Veterans and Consumers Fair Credit Act. The Military Lending Act caps annual interest at 36 percent and offers other safeguards. But there is likely to be strong lobbying against a nationwide interest rate cap. The American Bankers Association has opposed the idea in the past, and lenders who make loans with high interest rates are already speaking out in dramatic terms. "Our estimate is that this will redline 150 million Americans from access to credit," says Mary Jackson, CEO of the Online Lenders Alliance. She says people need these loans. She agrees that the interest rates are high — averaging more than 100 percent a year for the lenders she represents. But Jackson says that is justified by the risk that lenders take in making these loans. She cites a World Bank policy paper that found while rate caps can prevent predatory lending, they can also have unintended consequences. "Our customers are accessing our loans to solve an immediate problem that they have," Jackson says. "If their car breaks down it means they can't get to work, so these loans are very, very helpful." She argues that a rate cap would take away access to these loans.

Pensions Venture into Risky Corners of the Market in Hunt for Returns

Some pension fund managers are venturing further into unusual investment territory as this year’s plunge in bond yields makes it even harder to find decent long-term returns, the Wall Street Journal reported. Funds are dabbling in riskier asset classes, including private markets, real estate projects, infrastructure financing and direct lending. Some are making riskier fixed-income bets, buying volatile assets such as 100-year Argentine government bonds. Others are going farther afield, investing in greenhouses and waste management. The giant pools of retirement money are under pressure to take on more risk following decades of declining interest rates that have chipped away at returns from their traditional bond-heavy portfolios. Those concerns have been exacerbated this year as yields on government bonds dropped sharply and central banks loosened monetary policy to stimulate economic growth. Pension funds’ allocations to alternative asset classes rose to 26 percent in 2018 in the U.S., U.K., Japan, Australia, Canada, Switzerland and the Netherlands, from 19 percent in 2008, according to estimates from Thinking Ahead Institute, a research firm affiliated with Willis Towers. The allocation to bonds has remained steady at around 30 percent. That trend shows no signs of reversing, investors and analysts say. (Subscription required.)

Law Firm Debt Levels Shrink as Partners Put More Skin in the Game

A recent examination of major law firm failures showed how expansion and revenue gains can sometimes mask the struggles of law firms saddled by massive debt. Eventually, the debt load becomes too heavy, choking off growth and hastening collapse, reported. But industry watchers say law firms have become less reliant on bank debt over the past decade, as they explore other funding options. Often, that means raising capital from partners, or turning to other, less common sources. Michael McKenney, managing director of Citi Private Bank’s Law Firm Group, said “a deleveraging” has occurred at law firms since the Great Recession, when firm leaders started to reconsider how they funded operations and growth. “The debt load carried by firms today is quite a bit different from the debt load that was carried by firms in 2008 and 2009,” McKenney said, looking at a sample of 60 law firms in the Am Law 100, which does not include any firms that completed significant mergers or acquisitions in the past 10 years. Among that sample, he said, bank debt per equity partner was $94,000 at the end of 2008. At the end of 2018, bank debt per equity partner was $57,000 at the same 60 firms. But on the flip side, McKenney said, capital contributions per equity partner have jumped, from $330,000 in 2008 to $549,000 in 2018. The increase is due in part to law firms’ success in recent years, he noted, as capital contributions are often taken as a percentage of a partner’s earnings.

Judicial Conference’s Public Comment Period for Proposed Rules on SBRA Open Until Next Wednesday

On February 19, 2020, the Small Business Reorganization Act of 2019, P.L. 116-54 (SBRA), will go into effect – long before the normal three-year rules amendment process runs its course. As a temporary measure, the Advisory Committee on Bankruptcy Rules has drafted Interim Bankruptcy Rules that can be adopted by courts as local rules or by general order when the SBRA goes into effect. The Advisory Committee has also drafted amendments to the Official Forms to address the SBRA. The Standing Committee now seeks comment on the proposed SBRA rules and forms for a short four-week period prior to making final recommendations.

- Interim Bankruptcy Rules 1007(b), 1007(h), 1020, 2009, 2012(a), 2015, 3010(b), 3011 and 3016.
- Official Forms 101, 201, 309E, 309F, 314, 315, 425A, and new Official Forms 309E2 and 309F2

The comment period is open until November 13, 2019. Because of the short publication period for the Interim Rules and related Official Forms, there will be no public hearings.

Read the text of the proposed amendments and supporting materials.

Written comments are welcome on each proposed amendment. The Advisory Committee on Bankruptcy Rules will review all timely comments, which are made part of the official record and are available to the public. The comment period closes on November 13, 2019. Click here to submit a comment.

Photos of ABI's Opening Reception and Programming at NCBJ's 2019 Annual Conference Now Available on Flickr!

Attend NCBJ's 2019 Annual Conference in Washington, D.C., last week? Be sure to visit ABI's Flickr page to find pictures from the opening reception and ABI's programming on Nov. 1. Click here to browse.

Former ABI President Releases New Song on Spotify/iTunes

As chair of Pachulski Stang Ziehl & Jones’s post-confirmation practice group, Andy Caine oversees the entire spectrum of claims and avoidance litigation for debtors, creditors' committees, trustees, liquidation or post-confirmation trusts, and defendants, from “mega cases” to smaller, individual matters. He served as ABI President from 2002-03. Andy is also an accomplished musician, singer and songwriter. Earlier this year, he released an EP of his work on Spotify and iTunes. Listen to his newest release, "Promised Land," on Spotify.

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New on ABI’s Bankruptcy Blog Exchange: Purdue Pharma Examiner?

The U.S. Trustee should move for the appointment of an examiner in Purdue Pharma's bankruptcy. That's what Profs. Jonathan Lipson, Stephen Lubben, and Adam Levitin wrote in a letter to the U.S. Trustee for Region 2 this week, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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