July 31, 2014

Should Student Loan Debt Once Again Be Dischargeable in Bankruptcy?

student loans and bankruptcyLast week, an editor at the Atlanta Journal Constitution contacted me to ask if I would write a guest editorial about student loans and bankruptcy.  Here is a slightly enhanced version of my editorial.  Click on the link to view the original online version of the article

Imagine graduating from college with a tassel and $80,000 of student loan debt.  Now imagine that life happens over the next 15 years – periods of unemployment, no raises, a sick child, and home repairs.  Perhaps you are one of the 50,000 metro Atlanta area families each year who make the difficult decision to file personal bankruptcy.  How does it feel to discover that your student loan debt will survive bankruptcy, never to go away.  Tax refunds?  Seized.  Wages, bank accounts, even Social Security?  Garnished.

About 4% of student loan debt is owed by parents, and over 11% of parent student loan debt is in default.  Parents forced into bankruptcy because their adult children cannot or will not pay their student loans is also not dischargeable.   The highest rate of student loan debt is associated with for profit trade schools which often charge as much as a 4 year college for a 2 year degree in such subjects as culinary arts, medical assisting, paralegal studies and cosmetology.  With jobs scarce, default rate for trade school student loan debt can approach 30%.

Currently the federal bankruptcy law does not allow debtors to discharge student loans except in rare circumstances.  Prior to 1998, however, student loans could be discharged if they were more than 7 years old.  It is time to return to this common sense standard that would create a reasonable balance between personal responsibility, economic reality and the law’s stated goal of offering honest but unfortunate debtors a fresh start.

The law’s enhanced protection of student loan arises not from reasoned policy debate but from the lobbying power of both colleges and lenders who feed at the trough of government loan guarantees.  It is time for the market, not Congressional largesse, to assign risk to colleges and student loan lenders.

Over the past 30  years, college administrators have raised tuition prices at a rate of close to 8% per year, far more than inflation. Why?  Their consumers are 18 year old freshmen who are told to “sign here” without any practical disclosures about the monthly financial burden that will descend 6 months after graduation.  The University of Georgia, for example, estimates that the tuition, housing and food cost of a four year degree will exceed $80,000.  Out of state residents attending state schools will expend close to $160,000 and private school students will pay even more.

Banks that issue government backed student loans enjoy the windfall of guaranteed interest accrual of around 7%, plus an iron clad  guarantee of payment.  Indeed the same market distortion that created our current housing crisis is alive and well in the student loan market, but this time it is Sallie Mae struggling to withstand the tsunami of over $1 trillion and rising of student loan debt.

Student loan creditors are also using private debt collectors to recover delinquent accounts.  And  unlike credit card collection agencies, student loan collectors will not compromise accounts and readily use the threat of non-judicial wage garnishment, income tax refund seizures and negative reporting to credit bureaus.

Bankruptcy is not and should not be an easy way out.  It is a necessary safety valve to protect financially struggling Americans from indentured servitude to their creditors.  All but a handful of the hundreds of clients I have represented over the past 22 years in my Atlanta bankruptcy practice have been honest, hardworking men and women facing the prospect of unmanageable debt.  Those who choose bankruptcy will face strict court scrutiny of their budgets and a required  repayment plan if they show an “ability to pay” based on stingy budget expense allowances derived from what the IRS uses in tax settlements.

The pre-1998 version of the Bankruptcy Code permitted debtors to treat student loan that had come due more than 7 years earlier the same way as general unsecured debt such as credit cards and unsecured personal loans.  In a return to prior law, student loan creditors would retain the right to challenge the discharge of individual debtors in cases of abuse. It is time to return this limited lifeline to struggling American families.

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Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.
About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.

Comments

  1. Jonathan, excellent post! It is time for a common sense approach to student loan debt. If something is not realized soon, we are looking at financial crisis worse than the housing one. At least mortgage banks have the equitable remedy to foreclose and recover property. With these student loans, we will have stagnant debt with no means of repayment.

    I have not seen one reasonable argument why student loan lenders face absolutely no risk for their return. Can someone show me where I can get a 7% return on my money with no risk?

    “The law’s enhanced protection of student loan arises not from reasoned policy debate but from the lobbying power of both colleges and lenders who feed at the trough of government loan guarantees.”

    That line really sums it up for me!

  2. Frank, thanks for the comment. I have never understood why student loan lenders deserve more protection than the IRS.

  3. rebecca brown says:

    My wages are garnished as of two weeks ago.my loan has gone fron 12,000 to 28,000. I am 55 and see no end in site.I will try to save money to buy a cash car and relieve myself of a 2008 car (that I purchased last November for 11,000 at a interest rate of 20%) so I could go to work in order to satisfy the apetite of collections agency.I feel that the loan’s interest and collection fees should never double the original loan amount.That is over 100% interest!!I had ajob as atechnician before the usa government closed the place because they has amonopoly on a tool used for drilling oil.

  4. Rebecca, this might be a situation where it makes sense to discuss your options with a bankruptcy lawyer.

  5. Why should any person who borrows money be exempt from paying it back? Just because you expected to be a Brain Surgeon but didn’t pass and/or get a job does not mean you should default on your loan. You meant to get a great job on money not your own and it backfired. Suck it up like the rest of us have to do and pay the money.

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