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The History of Student Loans in Bankruptcy
Almost everyone knows that student loans are basically non-repayable. In some very specific circumstances, even today, you can get your student loan debt forgiven, but this is a rare exception that usually takes struggle and money to fight. We’ll discuss the current state of discharge capabilities in a future post.
The picture of student loans and bankruptcy isn’t always so bleak. Not so long ago, these loans were repayable. Back when they could leave the hospital, the cost of education was much lower and total student loan debt was a fraction of what it is now. With student loan debt currently a $1,200,000,000,000.00 (trillion 200 billion) problem preventing people from buying a home or participating in the broader economy, with a little help they could be debt-free again.
A brief history.
Student loans didn’t really come into existence in the United States until 1958, with the National Defense Education Act. 1. These loans were given to encourage students to pursue degrees in math and science to keep us competitive with the USSR. 2. In 1965, the Johnson government launched the Guaranteed Student Loan or Stafford Loan Scheme. Over time, additional loan programs emerged. As the subsidies colleges receive decline over time, the need for student loans becomes greater. Take Ohio State University, for example. In 1990, they received 25 percent of their budget from the state, which had dropped to 7 percent by 2012. In the absence of state funding, universities and colleges have increased tuition fees to compensate for the reduction in state funding.
Educational costs are rising.
The inflation-adjusted cost of higher education over time is such that in 1980 the average cost of tuition, room and board at a public institution was $7,587.00 (in 2014 dollars), by 2015 it had risen to $18,943.00 (in 2014 US dollars). Taking inflation into account, the cost of higher education in 35 years has risen by a factor of 2.5. In contrast, inflation-adjusted housing costs have remained virtually unchanged, rising just 19% from 1980 to 2015 after the bubble and housing crisis cleared. 3. Or compare to wages that did not increase outside of the top 25% over the same period. Looking at affordability in terms of minimum wage, it’s clear that loans are increasingly necessary for anyone wanting to attend college or university. In 1981, people earning the minimum wage could work full-time in the summer and earn almost enough to cover their annual college expenses, with a small amount left over through grants, loans, or working during the academic year. 4. In 2005, students earning the minimum wage had to work a full year and use all of the money to pay for their education to pay for a year at a public college or university. 5. Now think about it, about 40 million people have student loan debt above the $1.2 trillion mark. According to studentaid.gov, 7 million of these borrowers are in default, or about 18%. Default is defined as 270 days in arrears on a student loan. Upon default, the loan balance will be increased by 25% and sent to collections. The collection agency gets a commission on the debt collected and is usually owned by the entity that originated the loan, namely Sallie Mae.
The construction of a student debt prison.
Prior to 1976, student loans could be discharged without restriction in bankruptcy. Of course, if you look back at the statistics from that time, there’s not much to say about student debt. When the U.S. bankruptcy law was enacted in 1978, the ability to discharge student loans was curtailed. At that time, in order for your loan to be forgiven, you must make repayments for 5 years or demonstrate that such repayments would constitute undue hardship. The rationale for narrowing the discharge is that it would hurt the student loan system as student debtors flock to bankruptcy to discharge their debts. However, the facts do not support the attack. By 1977, only 0.3 percent of student loans were discharged in bankruptcy. 6. However, the high wall remains closed to student debtors. Until 1984, only private student loans offered by nonprofit higher education institutions were forgivable. 7. Next, with the Bankruptcy Amendment Act of 1984 and the Federal Judges Act, all private loans from non-profit lenders were excluded. In 1990, the repayment period before surrender was extended to 7 years. 8. In 1991, the Emergency Unemployment Compensation Act of 1991 allowed the federal government to withhold up to 10% of a defaulting borrower’s discretionary wages. 9. In 1993, the Higher Education Amendment Act of 1992 increased the income contingent repayment by requiring a payment of 20% of disposable income for direct loans. 10. After 25 years of repayment, the remaining balance is 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 Amendment Act 1998 removed the provision allowing education loans to be released after 7 years of repayment. 12. In 2001, the US Department of Education began offsetting up to 15 percent of Social Security disability and retirement benefits to repay delinquent federal education loans. In 2005, what we call a “law change” in the field of bankruptcy, further narrowed the exceptions to discharge forgiveness to include most private student loans. Since private student loans are protected from forgiveness in bankruptcy, the cost of these loans has not been reduced. 13. If the rationale for excluding student loans is that the cost to students of obtaining loans would skyrocket, then that fact would seem to waste that argument.
After slowly saddling our students with unshakable debt, the government has worked out several ways to handle government-backed student loans outside of bankruptcy. In 2007, the College Cost Reduction and Access Act of 2007 added income-based repayments allowing for smaller repayments than income contingent repayments, 15% of disposable income and debt forgiveness after 25 years. 14. In 2010, the Health Care and Education Harmonization Act of 2010 created a new version of income-based repayments, cutting monthly repayments to 10% of disposable income and forgiving debt after 20 years. 15. This new and improved income-based repayment plan is only available to borrowers who did not have a loan prior to 2008. Additionally, those with defaulted loans will not be eligible for income-based repayments unless they reinstate those loans first. If you are interested in seeing if your loan is eligible for income-based repayment or income contingent repayment, please visit student aid dot gov. Unfortunately, none of these programs are doing anything to address private loans, a growing problem that currently stands at about $200,000,000,000.00 ($200 billion), or about 16% of total student loan debt.
what can we do?
The cost of education is relentlessly rising, the need for higher education to earn a living wage is only going to grow, and the ability of our graduates to repay those loans is diminishing. Why does the cost of education far exceed the inflation rate? Why are state and local governments reducing funding for college students? These are also issues that need to be addressed. My focus is the lack of access to real emissions options and how that drags down the rest of the economy. This is a problem. On September 8, 2015, Michigan Rep. Dan Kildee introduced a bill in Congress aimed at alleviating the burden on students and their families from increased educational costs and the financial strain of student loans. 16. The proposed legislation would repeal the emissions exceptions listed in 11 USC § 523 (a)(8).If you would like to comment on this issue, please call your congressional representative today and let them know where you stand on HR 3451
all the best,
Steven Palmer, Esq.
Licensed in WA and OH
2. PL 85-864; 72 Status. 1580
3. Case Schiller House Price Index, inflation-adjusted
4. Student Debt: Growing Bigger, Heather Boushey Center for Economic and Policy Research (September 2005).
5. Boushey (September 2005)
6. Ending Student Loan Exceptionalism: The Case for Risk-Based Pricing and Exemption, 126 Harv. L. Priest 587
7. Financial Aid dot Org, problems, bankruptcy
8. Crime Control Act 1990, PL 101-674, 11/29/1990
9. PL 102-164, 11/15/1991
10. PL 102-325, July 23, 1992
11. Debt Collection Improvement Act of 1996, PL 104-134, 4/26/1996
12. PL 105-244, 10/7/1998
13. 126 Harvest. L. Priest 587
14. PL 110-84, September 27, 2007
15. PL 111-152, March 30, 2010
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