By now everyone knows that the biggest portion of US household debt, besides mortgage debt, is a towering $1+ trillion in student loans, more than total outstanding credit cards or car loans, which is problematic for three main reasons: it is increasing at an unprecedented pace due to lax Federal lending standards, delinquent loans are soaring and are now well over $100 billion and rising at a pace of tens of billions each quarter, and it can not be discharged. At least that is conventional wisdom. But while points 1 and 2 are indisputable (and deteriorating), it is point 3 that is the more troubling for an entire generation of young men and women who are afraid to splurge on levered purchases such as houses due to an already insurmountable debt overhang, and a job market that is hardly hospitable to young entrants. Luckily, there may now be solution stamped in US case law.
Meet Mike Hedlund.
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This Klamath Falls native may have just made legal history by winning a 10 year battle to have the bulk of his $85,000 in federal student loans, which he accumulated as a law student at Willamette University in Salem, discharged. The result of this legal decision will likely have epic implications for an entire generation drowning in debt, as it has now "opened the flood gates" for all those in Mike's position to challenge their massive debt encumbrance.
And when it comes to Mike's case, there are millions who not only want to be like Mike: they are just like him. At least when it comes to their
Mike's story is well-known one: spending thousands to get a degree, he was unable to obtain the well-paying job he had studied for (although how much of that was market driven instead of purely due to incompetence is unclear: he failed the bar test three times), and instead was forced to settle for a low wage job paying $40,000 as a probation officer. He then filed for bankruptcy, demanding his slate be wiped clean, including the discharge of his (collateral-free) debt. What ensued was a ten year legal odyssey with lender Pennsylvania Higher Education Assistance Agency, which ultimately reached the Ninth Circuit court twice. In the end he prevailed, with the result being a reduction of debt owed by $53,000 from $85,000 to just $32,000 (unclear how many tens of thousands of dollars the legal bill was: but Mike doesn't have to worry about that - his parents footed it).
Here is Oregon Live [10]with the story, which most current and recent graduates can surely commiserate with:
Mike Hedlund waged a 10-year legal battle to force his lender to discharge most of the $85,000 in federal student loans he built up while earning his 1997 law degree from Willamette University in Salem.
When Hedlund graduated from Willamette, he owed two student loan companies. He struggled to pay either of them, but reached a deal with the smaller lender to repay $18,000 at $50 a month.
Hedlund was unable to make much use of his expensive law degree. He failed the Oregon bar exam twice in his first year out of law school, then locked his keys inside his car on the way to his third scheduled test, and so missed it entirely. He did not try again.
Instead, Hedlund got a $40,000-a-year job as a Klamath County juvenile probation officer, a job he still holds.
"I had planned on making $200 an hour instead of $20 when I agreed" to take out loans totaling about $100,000, Hedlund said.
Just a case of reality not jiving with one's exorbitant expectations? Seems like it:
[T]estimony from an employment expert convinced judges that Hedlund holds a good-paying job for Klamath Falls and wouldn't likely earn a whole lot more as a starting lawyer there, particularly if he worked in the public sector.
Of course, the same argument can be made by every Joe Sixpack rushing to buy a McMansion during the last housing bubble (not to be confused with the current one). But being accountable for one's choices is so 20th century.
With that in mind, Mike fought on:
Last week, in a decision that could affect debtors in eight states, a panel of the Ninth Circuit Court of Appeals in Pasadena, Calif., ruled in Hedlund's favor.
It upheld a bankruptcy judge's ruling that Hedlund proved all three factors necessary to have $53,000 of his debt forgiven: He made a good faith effort to repay the money; he can't earn enough to both repay the money and maintain a basic standard of living; and his inability to earn substantially more is likely to persist.
Who were the "villains" that granted Mike the funds needed to pursue the dream that promptly turned into a nightmare when reality collided with rosy models of what the future "should" be (see Federal Reserve for other instances of this):
He tried to negotiate a repayment plan with the firm he owed $85,000, called Pennsylvania Higher Education Assistance Agency, but that lender would not agree to a plan Hedlund felt he could remotely afford.
That lender exists to make money to help Pennsylvania students afford college, and it currently holds $39 billion worth of student loan debt. A previous director stepped down in 2007 after a state audit revealed he'd issued millions in lucrative, undisclosed bonuses to managers and executives.
When a judge agreed that all but $30,000 should be wiped clean, the Pennsylvania agency appealed, setting off a 10-year legal odyssey that twice reached the Ninth Circuit. Hedlund filed to represent himself before that high court, but Ninth Circuit judges awarded him pro bono representation by an experienced San Francisco firm.
The Portland-based lawyer who represented the lender said Friday he would ask an official with the agency to comment on the decision. None did.
Victory for Mike... and for everyone else who thought that by spending nearly $100,000 on an education pursuing a career would immediately result in financial utopia, and instead ended up with a menial, low-paying job.
"I owe a car instead of a house now," he said. "It's huge for me. What I've wanted all along is something I can afford," not having the slate wiped clean, he said.
He and his wife have three daughters, and his wife works one day a week. He coaches soccer on the side to supplement his income and continues to live frugally, he said. "We don't go on many vacations, other than day trips. My newest car is six or seven years old and our other one is a '96 Explorer."
Well, it is called a "bankruptcy" for a reason.
"I am happy that maybe this will help someone else in their dealings with the student loan people," he added.
The same people without whom he would be unable to go to school in the first place? The lawyer chimes in next:
"He had to make his showing, all this evidence, to get part of his loan discharged," Scott said. "This wasn't a case of, 'Oh, I went to school and I didn't get this dream job I thought I was going to get, so now I'm not going to pay what I owe.' He had made his best effort to pay."
And failed.
Ethical issues aside, perhaps a far bigger question is what happens when the flood gates now truly open:
Natalie Scott, a Eugene lawyer who represented Hedlund, said lawyers for the loan agency suggested that forgiving most of Hedlund's loans would "open the flood gates" to healthy college graduates claiming they couldn't earn enough and demanding their loans be forgiven.
Scott said thinks a smaller set of borrowers will be affected, because Hedlund's actions and circumstances were particularly compelling. He tried repeatedly to work out a payment plan that he could deliver on; he made some payments; he worked full-time at a good-paying job and applied for jobs paying more; and he put up with having $280 a month garnished from his wages for 16 months without objecting.
Well, no. Now that there is case law precedent, every student finding themselves to their neck in debt will try the same defense.
So great news for Mike. However, just like the great bank bailout of 2007, there is never a free lunch, and that trillion in debt on the Federal government's balance sheet will likely end up having to be made whole by someone. That someone will certainly be the Fed and the result will require even more deficit spending by the Treasury to provide the Fed with securities to monetize, even more pent up inflation, and even more unsustainable Federal debt for everyone.
Bottom line: who ends up footing the bill? Why you will dear taxpayer, in the form of even more "government" debt that will have to be, you got it, inflated away.
But in a culture in which nobody is accountable for their monetary decisions - from the too biggest to fail banker to the lowliest student pursuing levered dreams of a high-paying job - living up to the consequences of one's actions is so Old Normal.