Category Archives: Uncategorized

How the federal government can help student loan borrowers

Because of the structure of lending, the student today with a five year plan to graduate will spend up to a 1/3 of his life (25 years) paying for what he got, an education.  The economic value and quality of the education is, of course, important.

The federal government, through its Department of Education, has rigorous standards.  The Department of Education holds high schools, and even grade schools, accountable to these standards and reviews performance on a regular basis.  Insuring educational value is delivered to the American consumer is a clear and consistent federal goal.

But a breakdown has occurred on the college level: trade schools with inferior instruction and high pressure sales techniques have flooded the marketplace with high cost alternatives to public universities and institutions of higher learning.  These “for profit” colleges are fairly unregulated, and often not accredited by traditional sources.  Studies show their degrees are not given the same respect in the employment marketplace as those from publicly funded universities (such as Indiana University or Purdue) and “not for profit” universities (such as the University of Indianapolis or Butler University).

Sadly, trade schools promising a college education are often institutions of lower learning, less supervised in their access to federal funds than the average high school.  Yet in recent years they have received a large portion of the 1.3 trillion now owed on student loans. This is not small change.

That lack of federal supervision and oversight has been an opportunity for profiteers in the “education business”.  According to the business model many trade schools have endorsed, overpromising is just “good sales technique”.  Likewise, underdelivering is a way to “keep costs down” and profits up.  Unfortunately, this way of thinking is now pervasive: institutions of higher learning are thinking on a lower level, about profit achievement more than educational achievement.

Certainly the US Department of Education did not, and has not, endorsed such behavior.  But it has funded those schemes, using billions of dollars of federal student loan monies.  With all that money gone from the federal treasury, the student is expected to pay the US Department of Education regardless of high cost and little value.  Meanwhile, the student’s debt load has increased dramatically, but his earning power has not.

The trade school closures and bankruptcies, most recently ITT and Corinthian, create for the federal government a public relations nightmare:  the government must now collect from naive students the “ill gotten gains” which enriched institutions of lower learning in the billions of dollars from taxpayer funds.  As a former full time college professor for 6 years, I find this offensive.

Because the US Department of Education disbursed those funds without effective oversight, it now must find someone at fault.  Better late than never, as the old saying goes. If the US Department of Education can find someone to blame, so the reasoning goes, that federal agency can escape criticism of its role in this massive disbursement of federal funds without oversight.

The student loan debt is now owed to the federal government (through the Department of Education).  According to the debt arrangement, the federal government will now hold the student accountable for what was done.  For now, the federal government holds the student accountable for what was done by him, and likewise holds him accountable for what was done to him.

In this search for accountability, the US Department of Education has first pinned the blame on closed schools, but only to the extent the student was active in that time frame in seeking the degree.  As to the “real world economic value” of the product the student bought, this is not considered.  Nor is the cost considered, even if that cost is exorbitant for results obtained. Nevertheless, it is this undefined “price/earnings ratio” which will show the true value of the degree over time.

It would appear that the violations which the Department of Education has cited against ITT in recent years prove the point:  ITT was negligent.  But there is not yet an admission that all who supervised ITT and other schools were also negligent.  This would implicate the US Department of Education, the source of funds.  As to the student, that naïve student was the least effective or capable in supervising the trade school. The purse strings were held by the US Department of Education, without monitoring the use of those funds.

Nevertheless, the Department of Education has said in recent investigations that “the actions we are taking against ITT… are based on operational and financial risk…not on the finding that they (ITT) defrauded students”.  With this statement and policy on the part of the Department of Education, it would seem that erasing these student loans for those who have received modest benefit will not be easy, unless the school closed while they were enrolled currently.

A review of the Department of Education website indicates that the student loan discharge rules are numerous and restrictive. Nevertheless, it is the opinion of this author that those rules are arbitrary.  Federal judges can review such rules in bankruptcy proceedings creating “new rules” for discharge of student loan debt, on an individual basis.

For the time being, those rules are administered by collectors who receive a commission rate of 13 to 18% for collecting funds. They are not in the business of giving students a break.

Further review by the US Department of Education shows well documented abuses by student loan collectors, who do not discuss all options with students, as the collector hopes to funnel the former student into a profitable collection system. Thus, the US Department of Education makes it clear that they do not wish to deal with the issue of high debt and little value for the student.  The US Department of Education would rather delegate the task of considering the student’s dilemma to collectors working on commission.

Due to lack of oversight and abuse of federal funds, the United States Department of Education has issued “school fraud” rules for schools which accept federal student loan funds.  In short, these rules would limit, as of November 1st, 2016, the availability of these funds for schools which failed to demonstrate an educational benefit in line with the cost.  Of course this is the right rule for the future, regardless of whether the school is public or private, a “not for profit” or a school organized as a business.

But what about the past lending mistakes which have burdened low income students with high debt?  The bankruptcy in May, 2015 of the Corinthian Schools network caused the alarm bell to sound.  This publicly traded trade school/company had enrolled more than 70,000 students the year before, at more than 100 campuses.  This was becoming quite a massive problem, for more than just a few students. And trade schools are quite expensive, anywhere for 2 to 4 times the cost of public universities, with the vast majority of their funds coming from student loans.

On September 13th of this year, our own United States representative Luke Messer has filed a bill to restore the G.I. educational benefits for veterans who saw their moneys dissipated with closed trade schools. This could be a significant benefit to many.

Nevertheless, the future looks bleak for trade schools, and many bankruptcies beyond the ITT bankruptcy are anticipated. As to the student with unsustainable loan debt, there may be a silver lining to this dark cloud:  a student’s bankruptcy can adjust student loan debt, contrary to what most believe.

As to the future, the warning signs are clear.  Any college (public or private) which offers poor quality of education and low job placement, lack of transferability of credits, and high student debt can lead to financial ruin for all concerned.

It is time to clean up the mess.  Holding schools and accreditors accountable to the US Department of Education is a start.  The lack of accountability of the past is the next issue, shown in unsustainable student loan debt.  What can be done?  For now, the US Department of Education is of little help except after a school is closed, a fact that the federal courts will examine in adjusting that debt on an individual basis.

With hope for the future, we must look to productive solutions, even if in the courts.  It is important to insure education continues to be a meaningful goal for our youth.

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.

What the Experts Say: Why Small Businesses Fail

Recently, the SBA published a report entitled “Financial Difficulties of Small Businesses and Reasons for Failure”. It is instructive to review these causes, in examining your own business. (Keep in mind that there can be more than one reason for a business to fail–the statistics indicate what percentage of the small businesses attributed a certain factor as contributing to their failure).

  • 39% of small business failures are due to outside business conditions, such as new competition rent increases insurance or other costs
  • 28% of small business failures are due to financing, whether it is high debt service, loss of financing, or inability to get financing
  • 27% of small business failures are due to inside business conditions, such as mismanagement, decline in production, a bad location, or loss of major clients
  • 20% of small business failures are due to tax problems, with either state or federal authorities
  • 19% of small business failures are due to disputes with a particular creditor
  • 17% of small business failures are due to personal divorce, or health problems
  • 10% of small business failures are due to calamities, such as loss of goods or equipment in a natural storm.
  • 6% of small business failures are due to some “other” cause

A quick glance at these percentages shows that the significant majority of business problems are issues which the entrepreneur can control. Although he cannot control health problems or divorce, weather conditions or outside business conditions, he has some significant control over financing, inside business conditions, tax issues, and disputes with other creditors. Often times the entrepreneur is not “focused on the obvious” as he deals with other problems which come up daily. Nevertheless, we all must make sure financing is in order, and that the business is run in a businesslike way, so that the taxes are paid, for example, or those debts negotiated. Small businessmen must also stay in communication with creditors to avoid lawsuits, liens, attachments, garnishments, etc.

In order to prevent these obvious problems from occurring, small businessmen should pay particular attention to business formation issues, especially when business partners are involved. The structure and organization of the business should emphasize efficiency, profitability, and good tax treatment. In addition, a solid business plan never hurts. When a solid business plan falls apart and the projections are wrong, at least we can tell which assumptions need to be corrected.

In addition, communications with employees, vendors, suppliers, and customers is critical. Good contract drafting and solid negotiation skills help in formulating stable processes for all of these individuals upon whom we rely.

Of course when significant problems such as disputes with the IRS arise, they must be dealt with quickly and honestly. Resolving these disputes in a cost-effective manner is a central concern, as every business (particularly when cash flow is bad) attempts to conserve cash.

Do you have questions or concerns regarding any of these issues? Please do not hesitate to call me at (317) 266-8888 for further discussion of these matters.

Bank Workouts

While negotiating debt workouts with banks in the last few months, I’ve noticed a number of clients coming into my office with a significant financial problem: the bank has a lien on all of their assets, and they don’t have the cash flow to ensure that everyone gets paid, including the landlord, the bank, and other general creditors.

In these situations an old saying by Donald Trump seems appropriate: “When you owe the bank 1 million bucks and can’t pay it, you have a problem. When you own the bank 10 million bucks and you can’t pay it, the bank has a problem.” In other words, when cash flow is tight, the entrepreneur needs everyone involved to work with him.

Of course, if everyone can work together, the hard-working entrepreneur can pull his way out of a slump. However, sometimes in such a situation despair can set in, and the entrepreneur becomes filled with apathy, losing his drive. The obvious solution is to give the debtor a little breathing room, so that he can get back to focusing on what’s most important to resolving their financial issues: cash flow.

In a number of recent situations, my first approach was to sit with the bank, once learning they had collateral and all the assets of the business. This may seem like a precarious or risky position, but actually it is to the small businessman’s benefit. When the bank has the first claim on all the assets, there is nothing to fear from general creditors, who have no claim on assets due to the fact the debt is unsecured. As you can see, keeping the bank happy is critical.

But just because the bank is happy doesn’t mean the debtor’s problems are over. The debtor must continue to work hard, and work steadily. Creditors need to be alerted to the fact that bankruptcy is possible, if workout discussions are not productive for all parties. The debtor’s attorney will need to handle all lawsuits, and everyone involved needs to be given enough information to understand exactly what’s going on.

Are you worried about these kinds of issues? Call me on my small-business hotline, to discuss these matters, or schedule a consultation in the office by calling (317) 266-8888. We will try our best to get to the bottom of your issues, and help you to solve them quickly with minimal aggravation.

Budgeting

BUDGETING
The first step in budgeting is to create a spending plan. Using a spreadsheet program, such as Excel, is an excellent way to plan expenses and spending. It allows “what if” analysis; by simply changing the expense number, we can see immediately the impact on our finances.

Take a good hard look at your “discretionary” expenses. These are the only expenses which can be cut without strong lifestyle changes. The following expenses are easy to adjust: excess tax withholding, life insurance, 401(k) deductions which are not mandatory, clubs and recreational activities, cable TV expense, dining out, gambling, etc…

We must be careful to distinguish needs and wants. We all want many things, but need far less. Keep in mind that Money = Time, and Time = Money. The more you ‘want’, the more you will spend. The more you spend, the more time you must use to acquire, maintain, and pay for possessions.

Impulse buyers have more bills than they can pay, and have to spend more and more time working, just to stay afloat financially. They have little time for themselves or family. Health and relationships break down, just as possessions do if they are not maintained. The impulse buyer ends up tired and broke.

Don’t get distracted from your spending plan by retirement concerns or worries about health, rising expenses, changes in family situations, etc. A good plan is a good plan, no matter whatever else happens.

Realize that a spending plan is ultimately what you want, and what would be best for you and your finances. As we live in an imperfect world, it may take a while to get reality to match your plan. The plan can also be adjusted, as it merely establishes a target rate for spending. When in doubt, estimate income low, and expenses high.

How can we budget for variable expenses such as utilities? Use an average from the last year, and don’t forget to establish an emergency fund with a spending plan that allows a little bit of savings each month.

If you want a free excel budget spreadsheet, please do not hesitate to contact us. Take the time to create a budget…you’ll end up worrying less.

Recently I have posted on my blog a series of 6 videos which address the mechanics of budgeting. Interested? Watch the following: Planning part 1. If you feel that it’s helpful to you, go on to the next: Planning part 2. After, go on to part 3, part 4, part 5, and part 6.