The history of student loan bankruptcy
Student loans are generally non-dischargeable, almost everyone knows that. There are some very specific circumstances where even today you can discharge your student loan debt, but it’s a narrow exception that often requires a fight and money to fight for. We’ll discuss the current state of disclaimers in a future post.
The landscape surrounding student loans and bankruptcy wasn’t always so barren. Not too long ago, these loans were callable. Back when they could be discharged, the cost of education was much lower and total student loan debt was a fraction of what it is now. Since student loan debt is currently a $1,200,000,000,000.00 (one trillion and two hundred billion) dollar problem that is holding people back from buying homes or participating in the broader economy, with a little help they can once again become under on release.
Short story.
Student loans didn’t really take off in America until 1958 under the National Defense Education Act. 1. These loans were proposed 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 by the Johnson administration. Over time, additional loan programs emerged. The need for student loans has increased as the grants that universities receive have decreased over time. Take Ohio State for example. In 1990 they received 25% of their budget from the state, since 2012 this percentage has fallen to 7%. In the absence of state money, universities and colleges 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 like this: In 1980, the average cost of room and board at a public institution was $7,587.00 in 2014 dollars, and by 2015 , has grown to $18,943.00 in 2014 dollars. The cost of college education over 35 years, adjusted for inflation, has jumped 2.5 times. Compare that to inflation-adjusted housing costs, which have remained largely flat, increasing only 19% from 1980 to 2015, when the bubble and housing bust are removed. 3. Or compare to wages that, with the exception of the top 25%, have not increased over the same time period. Looking at affordability in relation to the minimum wage, it is clear that loans are increasingly necessary for anyone who wants to attend university or college. In 1981, a minimum-wage earner could work full-time during the summer and make just about enough to cover his annual college expenses, leaving a small amount he could raise from grants, loans, or working during the school year . 4. In 2005, a minimum wage student would have to work year round and put all that money toward their education to afford 1 year at a public college or university. 5. Now think about this, there are approximately 40 million people with student loans that are over $1.2 trillion. According to studentaid.gov, seven million of those borrowers are in default, which is roughly 18%. Default is defined as being 270 days past due on your student loan payments. Once they default, loan balances increase by 25% and are sent to collection. Debt collection agencies receive a commission on the debt collected and are often owned by the same organization that issued the loans, ie. Sally May.
The student debt prison building.
Before 1976, student loans were dischargeable in bankruptcy without any restrictions. Of course, if you look at the statistics from that time, there wasn’t much student debt to speak of. When the US Bankruptcy Code went into effect in 1978, the ability to repay student loans was narrowed. Back then, to have your loans written off, you had to make 5 years of repayment or prove that such repayment would be an undue hardship. The rationale for narrowing the discharge was that it would hurt the student loan system as student debtors flocked to bankruptcy to have their debts discharged. However, the facts do not support this attack. By 1977, only 0.3% of student loans were discharged in bankruptcy. 6. However, walls continue to close against student debtors. Until 1984, only private student loans made by a nonprofit institution of higher education were excluded from the exemption. 7. Then, with the passage of the Bankruptcy Amendments Act and the Federal Judiciary Act of 1984, private loans from all nonprofit lenders were excluded from discharge. In 1990, the repayment period before a discharge could be obtained was extended to 7 years. 8. In 1991, the Emergency Unemployment Compensation Act of 1991 allowed the federal government to garnish up to 10% of the 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 made toward Direct Loans. 10. After 25 years of repayment, the balance is simple. In 1996, the Debt Collection Improvement Act of 1996 allowed the offset of Social Security payments to pay off delinquent federal education loans. 11. In 1998, the Higher Education Amendments of 1998 removed the provision allowing repayment of education loans after 7 years of repayment. 12. In 2001, the US Department of Education began matching up to 15% of Social Security disability and retirement benefits to pay off delinquent federal education loans. In 2005, a “change in the law,” as we call it in bankruptcy, further narrowed the discharge exception to include most private student loans. Because private student loans were protected from discharge in bankruptcy, there was no reduction in the cost of these loans. 13. If the rationale for excluding student loans from discharge is that the cost to students of obtaining loans will rise, this fact would seem to refute that argument.
As a result of the slow march toward burdening our students with unshakable debt, the government has created several 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 lower payment than the income-based repayment, 15% of discretionary income, and debt forgiveness after 25 years. 14. In 2010, the Health and Education Reconciliation Act of 2010 created a new version of income-based repayment, reducing the monthly payment to 10% of discretionary income with debt forgiveness after 20 years. 15. This new enhanced income-based repayment plan is only for borrowers who have no loans from before 2008. Additionally, those with delinquent loans will not qualify for income-based repayment unless they first rehabilitate these loans. If you are interested in seeing if your loans qualify for income-based or income-contingent repayment, please visit Student aid dot gov. Unfortunately, none of these programs do anything to address private loans, a growing problem currently at about $200,000,000,000.00 (two hundred billion) or about 16% of total student loan debt.
What can we do?
The cost of education is inexorably rising, the need for higher education to earn a living wage is increasing, and the ability of our graduates to repay those loans is diminishing. Why is the cost of education outpacing inflation so much? Why are state and local governments cutting back on student funding? These are issues that need to be addressed as well. My focus is on the lack of a real exemption option and how it weighs on the rest of the economy. This is a problem. On September 8, 2015, Michigan Congressman Dan Kildee introduced a bill in Congress designed to reduce the burden on students and their families caused by the rising cost of education and the financial stress of student loans. 16. The proposed legislation would eliminate the exemption from liability set forth in 11 USC ยง 523 (a)(8). If you want to have your say on this issue, call your Congressman today and tell him where you stand on HR 3451
All the best,
Stephen Palmer, Esq
Licensed in WA and 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 Schiller home price index adjusted for inflation
4. Student Debt: Getting Bigger and Bigger, Center for Economic and Policy Studies by Heather Bushey (September 2005).
5. Boushey (September 2005)
6. ENDING THE STUDENT LOAN EXCLUSIVENESS: A CASE FOR RISK AND PERFORMANCE PRICING, 126 Harv. L.Rev. 587
7. Financial Aid dot Org, 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, 07/23/1992
11. Debt Collection Improvement Act of 1996, PL 104-134, 04/26/1996.
12. PL 105-244, 7.10.1998
13. 126 Harv. L.Rev. 587
14. PL 110-84, 27.09.2007
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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