Student loans are basically non-dischargeable, almost everyone knows
this. There are some very specific circumstances where even today you
can have your student loan debt discharged, but that is a narrow
exception that often requires a fight and money to fight. We will
discuss the current state of dischargeability in a future post.
The
landscape around student loans and bankruptcy has not always been so
desolate. Not so long ago these loans were dischargeable. Back when they
were dischargeable, the cost of an education was much lower and the
total student loan debt was a fraction of what it is now. With student
loan debt currently being a 1,200,000,000,000.00 (One Trillion Two
Hundred Billion) dollar problem holding people back from purchasing
homes or taking part in the broader economy, with a little help they may
become dischargeable yet again.
A Brief History.
Student
loans really did not pop into existence in America until 1958 under the
National Defense Education Act. 1. These loans were offered as a way to
encourage students to pursue math and science degrees to keep us
competitive with the Soviet Union. 2. In 1965, the Guaranteed Student
Loan or Stafford Loan program was initiated under the Johnson
Administration. Over time, additional loan programs have come into
existence. The necessity of loans for students has become greater as the
subsidies universities receive have fallen over time. Take Ohio State
for example. In 1990, they received 25% of their budget from the state,
as of 2012 that percentage had fallen to 7%. In the absence of state
money, universities and colleges have increased tuition to cover the
reduction in state money.
The Rising Cost of Education.
The
cost of higher education adjusted for inflation over time goes something
like this, in 1980 the average cost for tuition room and board at a
public institution was $7,587.00 in 2014 dollars and by 2015 it had gone
up to $18,943.00 in 2014 dollars. The cost of a higher education in 35
years with inflation accounted for has gone up by 2.5 times. Compare
this to inflation adjusted housing costs which have remained nearly
unchanged, increasing just 19% from 1980 to 2015 when the bubble and
housing crisis is removed. 3. Or compare to wages which, except for the
top 25%, have not increased over that same time period. Looking at
affordability in terms of minimum wage it is clear that loans are more
and more necessary for anyone who wants to attend university or college.
In 1981, a minimum wage earner could work full time in the summer and
make almost enough to cover their annual college costs, leaving a small
amount that they could cobble together from grants, loans, or work
during the school year. 4. In 2005, a student earning minimum wage would
have to work the entire year and devote all of that money to the cost
of their education to afford 1 year of a public college or university.
5. Now think about this, there are approximately 40 million people with
student loan debt somewhere over the 1.2 trillion dollar mark. According
to studentaid.gov, seven million of those borrowers are in default,
that is roughly 18%. Default is defined as being 270 days delinquent on
your student loan payments. Once in default, the loan balances increase
by 25% and are sent to collections. The collections agencies get a
commission on collected debt and are often owned by the very entity that
originated the loans, i.e. Sallie Mae.
The Building of the Student Debt Prison.
Prior
to 1976 student loans were dischargeable in bankruptcy without any
constraints. Of course, if you look back at statistics from that time,
there wasn't much student debt to speak of. When the US Bankruptcy Code
was enacted in 1978, the ability to discharge student loans was
narrowed. Back then, in order to have your loans discharged, you had to
be in repayment for 5 years or prove that such a repayment would
constitute an undue hardship. The rationale for narrowing the discharge
was that it would damage the student loan system as student debtors
flocked to bankruptcy to have their debt discharged. The facts, however,
did not support this attack. By 1977 only .3% of student loans had been
discharged in bankruptcy. 6. Still, the walls continued to close on
student debtors. Up until 1984, only private student loans made by a
nonprofit institution of higher education were excepted from discharge.
7. Next with the enactment of the Bankruptcy Amendments and Federal
Judgeship Act of 1984, private loans from all nonprofit lenders were
excepted from discharge. In 1990, the period of repayment before a
discharge could be received was lengthened to 7 years. 8. In 1991, the
Emergency Unemployment Compensation Act of 1991 allowed the federal
government to garnish up to 10% of disposable pay of defaulted
borrowers. 9. In 1993, the Higher Education Amendments of 1992 added
income contingent repayment which required payments of 20% of
discretionary income to be paid towards Direct Loans. 10. After 25 years
of repayment the remaining balance was forgiven. In 1996 the Debt
Collection Improvement Act of 1996 allowed Social Security benefit
payments to be offset to repay defaulted federal education loans. 11. In
1998, the Higher Education Amendments of 1998 struck the provision
allowing education loans to be discharged after 7 years in repayment.
12. In 2001, the US Department of Education began offsetting up to 15%
of social security disability and retirement benefits to repay defaulted
federal education loans. In 2005, "the law change" as we call it in the
Bankruptcy field further narrowed the exception to discharge to include
most private student loans. Since private student loans were given
protection from discharge in bankruptcy there has been no reduction in
the cost of those loans. 13. If the rational for excepting student loans
from discharge is that the cost to students to obtain loans would soar,
this fact would seem to lay waste to that argument.
In the wake
of the slow march towards saddling our students with unshakable debt,
the government created a couple of ways to deal with government backed
student loans outside of bankruptcy. In 2007 the College Cost Reduction
and Access Act of 2007 added income based repayment which allows for a
smaller repayment than income contingent repayment, 15% of discretionary
income and debt forgiveness after 25 years. 14. In 2010, the Health
Care and Education Reconciliation Act of 2010 created a new version of
income-based repayment cutting the monthly payment to 10% of
discretionary income with debt forgiveness after 20 years. 15. This new
improved income based repayment plan is only for borrowers who have no
loans from before 2008. Further, those with loans in default, will not
qualify for income based repayment unless they first rehabilitate those
loans. If you are interested in seeing if your loans qualify for income
based repayment or income contingent repayment please visit student aid
dot gov. Unfortunately, none of these programs do anything to deal with
private loans, a growing problem currently at around $200,000,000,000.00
(Two Hundred Billion) or around 16% of the total student loan debt.
What Can We Do?
The
cost of education is relentlessly marching upward, the need for a
higher education to earn a living wage is only becoming greater, and the
ability of our graduates to repay these loans is diminishing. Why is
the cost of education outpacing inflation by so much? Why are state and
local governments reducing funds they used to devote to college
students? These are questions that need to be addressed as well. My
focus is on the unavailability of a real discharge option and how it is
weighing down the rest of the economy. This is a problem. On September
8, 2015, Michigan Congressman Dan Kildee introduced a bill in Congress
intended to reduce the burden on students and their families caused by
the increasing costs of education and the financial stress of student
loans. 16. The proposed legislation would do away with the exception to
discharge listed in 11 U.S.C. § 523 (a)(8). If you want to have your say
on this issue, call your congress person today and let them know that
where you stand on H.R. 3451
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