Student loans are basically non-dischargeable, almost everyone knows that. There are some very specific circumstances in which even today your student loan debt can be canceled, but that is a limited exception that often requires a fight and money to fight. We will discuss the current status of downloadability in a future post.
The landscape around student loans and bankruptcy hasn’t always been bleak. Not long ago, these loans could be canceled. Back when they were downloadable, 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 two hundred billion) problem that prevents people from buying houses or participating in the broader economy, with a little help they can be repaid once again. .
A brief history.
Student loans didn’t really appear in the United States until 1958 under the National Defense Education Act. 1. These loans were offered as a way to encourage students to earn degrees in math and science to stay competitive with the Soviet Union. 2. In 1965, the Guaranteed Student Loan or Stafford Loan program was started under the Johnson Administration. Over time, additional loan programs have emerged. The need for student loans has grown as the grants that colleges receive have decreased over time. Take the state of Ohio, for example. In 1990, they received 25% of their budget from the state, as of 2012 that percentage had dropped to 7%. In the absence of state funding, 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 is something like this, in 1980 the average cost of tuition and food in 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 a higher education in 35 years with inflation accounted for has multiplied by 2.5. Compare this to inflation-adjusted housing costs that have remained almost unchanged, increasing only 19% from 1980 to 2015 when the bubble and the housing crisis were eliminated. 3. Or compare to wages that, except for the top 25%, have not increased during that same period of time. Looking at the affordability in terms of minimum wage, it is clear that loans are increasingly necessary for anyone who wants to attend college. In 1981, a person earning minimum wage could work full-time in the summer and earn almost enough to cover their annual college costs, leaving a small amount that they could improvise with grants, loans, or work during the school year. 4. In 2005, a student earning minimum wage would have to work all year long and spend all that money on the cost of their education to pay for a year at a public college or university. 5. Now think about it, there are roughly 40 million people with student loan debt somewhere in excess of $ 1.2 trillion. According to studentaid.gov, seven million of those borrowers are in default, or roughly 18%. Default is defined as 270 days late on your student loan payments. Once in default, loan balances increase 25% and are sent to collections. Collection agencies take a commission on the debt collected and are often owned by the same entity that originated the loans, namely Sallie Mae.
The building of the prison of the student debt.
Before 1976, student loans could be paid off in bankruptcy without any restrictions. Of course, if you look back at the statistics from that time, there wasn’t a lot of student debt to talk about. When the US Bankruptcy Code was enacted in 1978, the ability to cancel student loans was reduced. Back then, for your loans to be paid off, you had to be in payment for 5 years or show that such repayment would constitute an undue hardship. The reason for reducing the forgiveness was that it would damage the student loan system as student borrowers flocked to bankruptcy to have their debt forgiven. However, the facts did not support this attack. In 1977, only 3% of student loans had been paid off in bankruptcy. 6. Still, the walls continued to close in on the debtor students. Until 1984, only private student loans made by a nonprofit institution of higher education were exempt from forgiveness. 7. Later, with the enactment of the Federal Judgeship and Bankruptcy Amendments Act of 1984, private loans from all non-profit lenders were exempted from forgiveness. In 1990, the repayment period before a discharge could be received 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 available pay from delinquent borrowers. 9. In 1993, the Higher Education Amendments of 1992 added an income-conditional refund that required 20% of discretionary income to be paid for Direct Loan Program loans. 10. After 25 years of amortization, the remaining balance was forgiven. In 1996, the Debt Collection Improvement Act of 1996 allowed for offsetting Social Security benefit payments to repay delinquent federal education loans. 11. In 1998, the Higher Education Amendments of 1998 removed the provision allowing education loans to be canceled after 7 years of repayment. 12. In 2001, the US Department of Education began offsetting up to 15% of Social Security retirement and disability benefits to repay delinquent federal education loans. In 2005, “the law change,” as we call it in the bankruptcy field, further lowered the exception to forgiveness to include most private student loans. Since protection of private student loans from bankruptcy was granted, there has been no reduction in the cost of those loans. 13. If the reason for excluding student loans from forgiveness is that it would greatly increase the cost to students of obtaining loans, this would appear to undermine that argument.
In the wake of the slow march to burden our students with immovable 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 reimbursement that allows a reimbursement less than contingent income reimbursement, 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 that cuts 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 prior to 2008. Additionally, those with delinquent loans will not qualify for income-based repayment unless they first reinstate those loans. If you are interested in seeing if your loans qualify for income-based repayment or contingent income repayment, visit the gov student aid point. Unfortunately, none of these programs do anything to deal with private loans, a problem currently growing at around $ 200,000,000,000.00 (two hundred billion) or around 16% of total student loan debt.
What can we do?
The cost of education is increasing steadily, the need for higher education to earn a living wage is increasing, and the ability of our graduates to repay these loans is decreasing. Why is the cost of education so much higher than inflation? Why are state and local governments reducing the funds they used to spend on college students? These are questions that must also be addressed. My focus is on the unavailability of a real download 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 aimed at reducing the burden on students and their families caused by the rising costs of education and the financial stress of student loans. 16. The proposed legislation would remove the exception to discharge listed in 11 USC § 523 (a) (8). If you would like to have input on this issue, please call your Congressman today and let him know where you stand on HR 3451.
All the best,
Steven Palmer, Esq.
Graduated 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 House Price Index, Adjusted for Inflation
4. Student Debt: Bigger and Bigger, Center for Economic and Policy Research by Heather Boushey (September 2005).
5. Boushey (September 2005)
6. END THE EXCEPTIONALISM OF STUDENT LOANS: THE CASE OF RISK-BASED PRICES AND DISCHARGES, 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, 7/23/1992
11. Debt Collection Improvement 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/
