One Way to Tackle the Student Loan Crisis: Bankruptcy Court

(The Washington Post) —

Last month Sen. Elizabeth Warren (D-Mass.) debuted a proposal that would wipe away the majority of student debt through a generous forgiveness program. It may have been controversial among pundits, but it was popular with the public. Now there’s another plan out there that offers help, too — and Warren, along with fellow presidential candidates Sens. Bernie Sanders (I-Vt.), Kamala Harris (D-Calif.), Amy Klobuchar (D-Minn.), and Rep. Eric Swallwell (D-Calif.) are all co-sponsoring it.

Let’s talk about bankruptcy. Americans owe a collective $1.5 trillion in student loan debt, an amount that’s increased from $90 billion over the past two decades. In 2018, more than two-thirds of college graduates graduated with student loans. The average amount borrowed (from all sources) by a 2018 graduate is just under $30,000. The burden is impacting people from early adulthood to those in retirement: Some senior citizens are using their Social Security checks to pay back student loan bills. If all these people were facing unsupportable housing, credit card debt, medical or auto loan bills they could turn to a bankruptcy court for help. But short of something called “undue hardship,” an extremely difficult standard to meet, it’s essentially impossible to receive court-ordered relief from college loans.

The legislation, which debuted last week, would seek to fix this. It’s bipartisan, attracting two Republican co-sponsors in the House, including Rep. John Katko (R-N.Y.), who introduced a similar bill in the last session of Congress. It would, as sponsor House Judiciary Chair Jerrold Nadler (D-N.Y.) put it in a statement, “ensure student loan debt is treated like almost every other form of consumer debt.”

The issue goes back to the 1970s, when the banks and media outlets began pushing the narrative there was an explosion in new graduates declaring bankruptcy to unload their student loans. The Government Accountability Office (then the General Accounting Office) found that such acts were extremely rare. But little matter: In 1976, Congress passed legislation that banned students from receiving relief for their student debts for a period of five years.

Over the next several decades, they would extend that period to seven years, and then in 1998 they shut the door almost entirely on relief for federally issued loans. In 2005, as part of controversial “bankruptcy reform” legislation, that stricture was extended to privately issued loans as well. One man who supported all of this: Joe Biden, then a senator from Delaware. He championed the multiple changes that made it harder for people to declare bankruptcy and receive relief for their student debt.

Over that same period, student loan debt ballooned. That’s likely not a coincidence. Many things factored into the rise of debt financing of education, including the decreasing rates at which many states supported their public colleges and, most prominently, the growth of for-profit colleges. But the usual risk associated with loaning money is that the person might not pay it back; common sense says banning that outcome would lead to an exploding student loan market. When you can get blood from a stone, someone — the government, a bank or a financial institution specializing in refinancing student debt — will lend the rock money.

Restoring bankruptcy could protect borrowers in another way too, by potentially acting as a check on the careless treatment of debtors by the student loan servicers. In 2017, the Consumer Financial Protection Bureau sued Navient, claiming the student loan giant repeatedly did not tell borrowers experiencing financial difficulties about income-based repayment options, and instead pushed them into forbearance, a strategy that resulted in further interest charges and increased the amount borrowers owed.

At the same time, Education Secretary Betsy DeVos is slow-walking promised debt forgiveness to students defrauded by sketchy and predatory for-profit colleges. Meaningful bankruptcy reform would give these victims another option, as well as expand the potential for relief to former debt-encumbered students who also need the help but are outside of the relatively narrow eligibility groups to apply for relief.

Yes, there are other things we could do as well. A beefed up, income-based repayment program, with automatic enrollment and a more realistic assessment of the earned income needed for people to begin the process of paying back their loans, would make a significant difference. But that won’t help everyone, especially those whose loans did not originate with or are no longer held by the government.

It’s also worth noting that the students most likely to fall into default — that is, cease paying their student loans entirely — are those who attend for-profit colleges, who are disproportionately likely to be older, and come from a more economically disadvantaged background,than the traditional college student.

There is little evidence that people frivolously file for bankruptcy. If anything, it’s the opposite; many put off seeking help. There’s no reason to believe things would be different when it comes to student debt. Restoring the right to declare bankruptcy when one can’t financially handle paying for one’s education is a change that should be supported even by those who believe Warren’s debt forgiveness plan is too generous — or a giveaway to the wealthy.

The right to declare bankruptcy is fundamental to a capitalist economic system. We believe that people who make economic mistakes deserve a second chance. Think about it this way: Donald Trump has taken his businesses to bankruptcy court and excised many of his debts a half a dozen times, while people whose only mistake was doing their best to get ahead find it almost impossible to receive similar relief. That’s not right. We should fix that.

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