Private Student Loans and Bankruptcy

Private Student Loans and Bankruptcy November 2012 Prepared for MASFAP Presented by Steve Winnie, COO and General Counsel, Campus Door Holdings Inc.

Nothing within the physical or verbal content of this presentation is intended to be legal advice or a professional opinion regarding the likelihood of success or failure of any pending legislation. Please consult with your own counsel for legal advice. Disclaimer

I. What is Bankruptcy – Chapter 7 vs. Chapter 13 • II. Current Bankruptcy Law – 11 USC 523 (a)(8) • III. Current Application of Law – “Undue Hardship” Test • IV. Proposed Legislation • V. Other Alternatives • VI. Lender Perspectives on Changes to Existing Law • VII. Future Thoughts • VIII. Questions • XI. Presenter Bio • X. References Table of Contents

Chapter 7 Bankruptcy • Commenced by filing a petition with schedules of assets, liabilities, income and expenses • Often referred to as “liquidation” with immediate discharge of debts • Trustee is appointed to secure and sell non-exempt assets and use proceeds to pay claims from unsecured creditors • Remaining unsecured debt is discharged • Most debtors retain property rights • Certain debts not discharged: domestic support orders, taxes, student loans I. What is Bankruptcy – Ch 7 vsCh 13

Chapter 13 Bankruptcy • Commenced by filing a petition with schedules of assets, liabilities, income and expenses • Debtor submits a “plan of reorganization” under which he devotes his monthly “projected disposable income” to repay a percentage of unsecured debt over a period of 3 to 5 years • Each month the debtor makes a single payment to the trustee who then pays creditors according to the plan Ch 7 vsCh 13 (continued)

Which to file 7 or 13: • Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) • Imposes a “means Test” to determine if a debtor can file under Chapter 7 • If gross income is above the forum state’s median income, cannot use Chapter 7 • Recent strong enforcement against Chapter 7 filers Ch 7 vsCh 13 (continued)

In 2005, the exception to discharge was extended to include all education loans (private and federally backed) • A debtor in Chapter 7 OR Chapter 13 cannot discharge: • an educational loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or • an obligation to repay finds received as an educational benefit; or • any other educational loan that is a “qualified education loan” II. Current Law – 11 USC 523 (a)(8)

UNLESS excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents • Process – • Debtor files a bankruptcy petition (Chapter 7 or 13) • Creditor has the initial burden to establish the existence of the debt and that it falls into one of the nondischargeable categories (made by govt.; made by nonprofit; educational benefits; any qualified educational loan) [note the low bar to show that the substance of the transaction was educational even if ultimate use of the funds was not educational] • Debtor files an adversary proceeding and has to show an “undue hardship” Current Law (continued)

The “Undue Hardship” Test – within the adversary proceeding, the bankruptcy court must find that forcing the debtor to pay for the debt would impose an undue hardship upon the debtor and/or dependants • Most courts have adopted the 3-part Brunner Test. Debtor must prove all 3 of the following: • 1) That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if forced to repay; • 2) That additional circumstances exist indicating that the current state is likely to persist for a significant portion of the repayment period of the student loans; and • 3) That the debtor has made good faith efforts to repay the loan III. Current Application of the Law

First prong of Brunner – with current income and expense, debtor cannot maintain a minimal standard of living if forced to repay • What is a minimal standard of living? • Examples – it is excessive to pay for “amenities” like a boat, cable and cigarettes although some courts allow expenditures for reasonable expenses for cable, phone and Internet • Is debtor maximizing income and minimizing expenses? • Examples – rent out extra rooms/cut grocery budget ($550 per month is too much for 2 people) Current Application (continued)

Second prong of Brunner – present “additional circumstances” that show that the current circumstances will likely continue for a significant portion of the repayment period • Most important factor is that the additional circumstances are beyond the debtor’s control, not borne by free choice (e.g. switching to a lower paying career by choice will not suffice) • Debtors have tried a variety of causes here, most commonly medical conditions • Asperger’s syndrome and osteoporosis (enough) • Hodgkin’s lymphoma (enough) • Diabetes and resulting blindness (enough) • Depression caused by debt (not enough) Current Application (continued)

Third prong of Brunner – whether the debtor has made good faith efforts to repay the loan • Good faith is measured by efforts to obtain employment, maximize income and minimize expenses – in addition to payment history • Participating in alternative payment plans often shows good faith Current Application (continued)

H.R. 2028 – Private Student Loan Bankruptcy Fairness Act • Introduced by Rep. Cohen May 26, 2011 • Would eliminate private student loans from non-dischargeability • Stalled in committee by Rep. Smith • Internet petition on change.org to schedule a hearing for 2028 • Has 500 signatures – still needs 9627 more IV. Proposed Legislation

S. 1102 – Fairness for Struggling Students Act of 2011 • Introduced by Senator Durbin on May 26, 2011 • Would limit the nondischargeability protection to loans made, insured, or guaranteed in whole or in part by a governmental unit • Also stuck in committee Proposed Legislation (continued)

CFPB continues to advocate for dischagreability of private student loans • Bring back the time-lapse discharge (debtors had to wait five (5) years after a loan first became due before discharging the debt until 1990 / from 1990-1998 debtors had to wait seven (7) years) • Sell an interest in the debtor’s future earnings to the school or to private equity investors • Allow discharge after five(5) – seven(7) years of good faith payments • Parse out the fair market value of the debt and the amount of the claim equal to the fair market value would be nondischargeable V. Other Alternatives

It’s no surprise that Lenders favor the current framework which only allows discharge of private student loans if undue hardship can be demonstrated • From the CBA – “We made a contract with students to repay their loans, and that’s how the banking system operates.” • Lenders made credit and pricing decisions in reliance upon the current legal framework, so any changes could only be forward-looking VI. Lender Perspectives

If private student loans could be more easily discharged, Lenders will likely: • Restrict the availability of credit to some degree (but still attempt to meet demand) • Consider the risk of discharge in pricing the asset (both at the point of origination and in the secondary market) = pricing to the borrower will increase • Insurance and guarantee premiums would also increase • Wrestle with how to handle cosigners or add even more to combat bankruptcy Lender Perspectives (continued)

First, remember my disclaimer: Nothing within the physical or verbal content of this presentation is intended to be legal advice or a professional opinion regarding the likelihood of success or failure of any pending legislation. Please consult with your own counsel for legal advice. • Second, it is highly unlikely that any changes to the bankruptcy code will occur anytime soon • Politically, the Congress is focused on other issues right now VII. Future Thoughts

Third, there are other more pressing issues within higher education • Admissions policies and practices • Rising college costs • Proprietary schools and gainful employment rates - Even with the advocacy of the CFPB for a change, this topic has been raised and dismissed several times in the past. The current structure will likely remain in place for the foreseeable future. Future Thoughts (continued)

Feel free to ask them now • Or, e-mail them to me at steve.winnie@campusdoor.com VIII. Questions

Steve Winnie is the Chief Operating Officer and Chief Counsel of CampusDoor. He also serves as the Corporate Secretary and Security Officer and heads the company’s business development efforts. In his various roles, Mr. Winnie oversees all operational, legal and regulatory matters and manages intake and implementation of new clients and loan programs. Mr. Winnie has established a robust Regulatory Compliance and Internal Audit Program at CampusDoor which includes a Quality Control Review and Reporting Process which serves to mitigate regulatory risk across all loan programs. After graduating from Cornell Law School, Mr. Winnie worked in private practice in the Commercial Litigation Department of Philadelphia-based Pepper Hamilton, LLP. He then served as General Counsel to Campus Door, Inc. from 2006-2008. Mr. Winnie then worked as Associate General Counsel at Sallie Mae where his practice focused on private student loan originations, specifically marketing and advertising, new product development and regulatory compliance. Mr. Winnie rejoined CampusDoor in late 2009. Mr. Winnie earned his Bachelor of Arts degree in Political Science from Mansfield University of Pennsylvania and his J.D. from Cornell Law School. He is also a graduate of the ABA National Compliance School held in Atlanta, Georgia. Mr. Winnie is admitted to practice law before the state and federal courts of the Commonwealth of Pennsylvania. Mr. Winnie is a frequent speaker at industry conferences and events and his recent presentations have included Operational Impacts of the revised Truth-in-Lending student loan provisions and oversight of the private student loan industry by the Consumer Financial Protection Bureau. Steve serves as a member of the Board of Directors for the local chapters of the YMCA and United Way and his interests include spending time with his family, basketball and obstacle course racing. IX. Presenter Bio

The Indentured Generation: Bankruptcy and Student Loan Debt by Daniel A. Austin, Northeastern School of Law; Santa Clara Law Review vol. 53 (forthcoming). • 11 U.S.C. 523(a)(8). • Senate Bill 1102. • House Bill 2028. • Campton v. U.S. Dept. of Educ., 405 B.R. 887, Bankr. N.D. Ohio 2009). • Mandala v. ECMC, 310 B.R. 213, (Bankr. D. Kan. 2004). • In re Todd, 2012 WL 1862341 (Bankr. Md. 2012). • Let Student Loans be discharged in bankruptcy by Eileen Ambrose, The Baltimore Sun; July 29, 2012. References Used

Private Student Loans and Bankruptcy