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Almost everyone knows that student loans are basically non-dischargeable. There are some very specific circumstances where you can still discharge your student loan debt today, but it’s a narrow exception that often requires a fight and money to fight for. We’ll discuss the current state of dischargeability in a future post.
The landscape around student loans and bankruptcy hasn’t always been so bleak. Long ago these loans were not dischargeable. Back when they were dischargeable, the cost of education was much less and total student loan debt was a fraction of what it is now. The $1,200,000,000,000.00 (One Trillion Two Hundred Billion) dollar problem of student loan debt currently preventing people from buying homes or participating in the broader economy could be re-discharged with a little help.
a brief History.
Student loans didn’t really come into existence in the US 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 introduced under the Johnson Administration. Over time, additional loan programs came into existence. The need for student loans has become greater as the subsidies that universities receive have decreased over time. Take Ohio State, for example. In 1990, they received 25% of their budget from the state, a percentage that had fallen to 7% by 2012. In the absence of state money, universities and colleges have raised tuition to make up for the shortfall in state money.
Rising cost of education.
The cost of higher education, adjusted for inflation over time, is as follows; in 1980 the average cost of tuition, room and board at a public institution was $7,587.00 in 2014 dollars and by 2015 it had risen to $18,943.00 in 2014 dollars. The cost of higher education has increased 2.5 times in 35 years according to inflation. Compare this to inflation-adjusted housing costs that have remained virtually unchanged, increasing just 19% from 1980 to 2015 when the bubble and housing crisis went away. 3. Or compare with wages, which have not increased over the same time period, except for the top 25%. Given the affordability of the minimum wage, it is clear that loans are more and more essential for anyone who wants to attend university or college. In 1981, a minimum wage earner could work full-time over the summer and earn 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. could deposit. 4. In 2005, a student earning minimum wage would have to work a full year and have that entire money cover 1 year of a public college or university to cover the cost of their education. 5. Now think about it, there are about 40 million people with student debt far exceeding the $1.2 trillion mark. Seven million of those borrowers are in default, according to StudentEd.gov, which is about 18%. Default is defined as being 270 days past due on your student loan payments. Once in default, the loan balance increases by 25% and is sent to collections. Collection agencies receive a commission on the debt collected and are often owned by the entity that originated the debt, ie Sallie Mae.
Student Loan Jail Building.
Prior to 1976, student loans were dischargeable in bankruptcy without any barriers. Of course, if you look at the statistics at the time, there wasn’t much student debt to speak of. When the US Bankruptcy Code was enacted in 1978, the ability to repay student loans was reduced. After that, in order to repay your loans, you must remain in repayment for 5 years or prove that such repayment would cause an undue hardship. The rationale for reducing the discharge was that it would harm the student loan system as student borrowers went bankrupt to discharge their loans. However, the facts did not support this attack. By 1977 only .3% of student loans were repaid in bankruptcy. 6. Still, the walls kept closing in on student debtors. Until 1984, only private student loans held by a non-profit institution of higher education were excluded from discharge. 7. With the enactment of the Bankruptcy Amendments and the Federal Judgeship Act of 1984, private loans from all nonprofit lenders were excluded from discharge. In 1990, the repayment period was extended to 7 years before obtaining discharge. 8. In 1991, the Emergency Unemployment Compensation Act of 1991 allowed the federal government to garnish up to 10% of disposable wages of defaulting borrowers. 9. In 1993, the Higher Education Amendments of 1992 added Income Contingent Repayment, which required 20% of discretionary income to be paid toward Direct Loans. 10. Balance waived off after 25 years of repayment. In 1996 the Debt Collection Reform Act of 1996 allowed the offset of Social Security benefit payments to repay defaulted federal education loans. 11. In 1998, the Higher Education Amendment of 1998 struck down a provision allowing education loan to be waived after 7 years of 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, a “law change” as we call it in the bankruptcy arena narrowed the exception to include most private student loans. Since private student loans were protected from discharge in bankruptcy, the cost of those loans has not gone down. 13. If the argument for separating student loans from discharge is that it would increase the cost of obtaining loans for students, then this fact nullifies that argument.
In light of the slow pace toward making our students saddled with delinquent debt, the government created some 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 smaller repayments than income contingent repayment, up to 15% of discretionary income and loan forgiveness after 25 years. 14. In 2010, the Health Care and Education Reconciliation Act of 2010 created a new version of income-based repayment, with a reduced monthly payment of 10% of discretionary income with loan forgiveness after 20 years. 15. This new advanced income based repayment scheme is only for those borrowers who do not have any pre-2008 loan. In addition, people whose loans are in default will not be eligible for income-based repayment unless they first rehabilitate those loans. If you are interested in seeing whether your loans are eligible for Income Based Repayment or Income Contingent Repayment, please visit student aid dot government. Unfortunately, none of these programs do anything to tackle private debt, a growing problem currently at approximately $200,000,000,000.00 (two hundred billion) or about 16% of total student loan debt.
what can we do?
The cost of education continues to trend upward, the need for higher education to earn a living wage is only getting higher, and the ability of our graduates to repay these loans is shrinking. Why is the cost of education so much higher than inflation? Why are state and local governments reducing funding for college students? These are questions that also need attention. My focus is on the unavailability of a genuine discharge option and how it is undermining the rest of the economy. This is a problem. On September 8, 2015, Michigan Congressman Dan Kildee introduced a bill in Congress aimed at reducing the burden on students and their families due to the rising cost of education and the financial strain of student loans. 16. The proposed law would remove the exception to discharge listed in 11 USC § 523(a)(8). If you want to have a say on this issue, call your member of Congress today and let them know where you stand on HR 3451
Best wishes,
Steven Palmer, Esq.
Licensed in WA & OH
1. http://www.eoionline.org/blog/the-great-cost-shift-college-was-once-a-ticket-to-opportunity-now-its-a-roadblock/
2. PL 85-864; 72 stat. 1580
3. Case Shiller Home Price Index, Inflation Adjusted
4. Student Loans: Bigger and Bigger, by Heather Bouche, Center for Economic and Policy Research (September 2005).
5. Bushe (September 2005)
6. Ending Student Loan Exceptionalism: The Case for Risk-Based Pricing and Discharge Eligibility, 126 Harv. L Rev. 587
7. financial aid dot organization, questions, bankruptcy
8. Crime Control Act of 1990, PL 101-674, 11/29/1990
9. PL 102-164, 11/15/1991
10. PL 102-325, 7/23/1992
11. Debt Recovery Reform Act of 1996, PL 104-134, 4/26/1996
12. PL 105-244, 10/7/1998
13. 126 Harv. L Rev. 587
14. PL 110-84, 9/27/2007
15. PL 111-152, 3/30/2010
16. http://www.ncbrc.org/blog/2015/09/15/proposed-bill-eliminates-student-loan-discharge-exception/
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