Last 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.