Student loans are nearly impossible to repay in bankruptcy. The legal standard for dismissal is “undue hardship,” but the legal code does not define what undue hardship actually is. So the judges in each district rule on it. They look at the “totality of the circumstances,” which is legalese for considering many factors in a person’s situation, assigning different weights to those factors, and deciding which way the scale of justice leans. Typically, this means the debtor must have a disability and is unlikely to generate sufficient income to repay. If the debtor had a disability when he borrowed the money for the school, the disability must generally have worsened considerably. The bottom line is it’s difficult and the results aren’t standard, which means they’re inconsistent.
My own student loan debt is absolutely crushing. I’m back in school part time and taking LLM courses now just so I don’t have to pay what I already owe because I can’t afford to pay and I’m trying to avoid a default until my situation improves.
The last bill introduced in the Legislature proposing the release of student loan debt failed. At the time, student loans were repayable. As recently as September 2009, lawmakers were taking testimony to consider whether a change would allow the disbursement of at least private student loans. Private student loans are not the same as federal taxpayer-backed loans. But even this proposal is meeting with considerable opposition and does not seem to be a priority at the moment. Perhaps many more victims will have to fall before there is increased attention and awareness of the immense suffering that these easy-to-obtain loans are causing to growing numbers of people.
Some organizations strive to change the law and present convincing arguments. One argument is that lenders recklessly lend money to anyone with a Social Security card. Default rates on student loans are only tracked for up to one year after graduation. This is ridiculous, because deferment, forbearance, and using credit and help from family can usually get people through that first year. What would be more telling would be a review of default rates 4-5 years after graduation.
A view held by many is that what had been happening in the home loan industry for the better part of the last ten years has and continues to happen in the student loan industry. Financial institutions bundle private student loans and sell them as investments. This could very well be the next bubble waiting to burst. This will be especially true if the economic recovery is slow, such that there are simply not enough wages and/or jobs to pay off those debts. It is no exaggeration to think that the private student loan industry is a major contributing factor to the unprecedented rise in tuition fees. What home loans have done for the housing market could very well be what private student loans are doing to the education market, contributing greatly to the 10-20% increase in tuition costs year after year.
There are arguments that if you change the bankruptcy law to make student loan discharge easier, people will take advantage of it by borrowing and declaring bankruptcy soon after graduation. This can be solved by creating a time limit, such as requiring student loans to be at least more than 5 or 7 years old. Lenders might also require co-signing to better protect their investment. It could also mean that the prospective student and the co-signer (usually a parent) would consider the implications of the debt more deeply.
Another argument is that if you make loans dischargeable, it will dry up funding for new students. That’s probably correct. However, maybe it has to happen. Lenders, by being stricter about who and how much is lent out, would likely reduce the amount of money available to students. Yes, some populations would be more affected than others, mainly low-income students. But consider the effect of borrowing too much on those same people now. A generation of the poor is rising as a result. Arguably, it is also a drag on the economy since these debtors have little or no disposable income to make purchases that create other jobs and ultimately benefit everyone. If funding dries up, there is also another possibility. Empty seats in classrooms could force educational institutions to do something that could benefit everyone, lower tuition fees, making attendance more affordable. The theory of supply and demand could be at the origin of this change.
Huge student loan debts are causing enormous suffering for ambitious, hard-working and diligent people who borrowed thinking they were making a wise choice and a chance to better their lives. Unbeknownst to them, most of them seemed doomed to a life of financial suffering.
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