Student loans are basically non-dischargeable, almost everyone knows that. There are some very specific circumstances where even today you can pay off your student loan debt, but that is a small exception that often requires a fight and money to fight. We will discuss the current state of downloadability in a future post.

The landscape around student loans and bankruptcy hasn’t always been so bleak. Not long ago these loans were downloadable. Back when they were cancelable, 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 (one trillion two hundred billion) dollar problem preventing people from buying homes or participating in the broader economy, with a little help they can get back to be downloadable.

A brief history.

Student loans didn’t really emerge in the United States until 1958 under the National Defense Education Act. 1. These loans were offered as a way to encourage students to pursue math and science degrees to stay competitive with the Soviet Union. 2. In 1965, the Guaranteed Student Loan or Stafford Loan program was started under the Johnson Administration. Over time, additional loan programs have emerged. The need for student loans has become greater as the subsidies colleges receive have decreased over time. Take the state of Ohio, for example. In 1990 they received 25% of their budget from the State, as of 2012 that percentage had dropped to 7%. In the absence of state money, universities and colleges have increased tuition to cover the reduction in state money.

The rising cost of education.

The cost of higher education adjusted for inflation over time is more or less like this, in 1980 the average cost of tuition for room and board in a public institution was $7,587.00 in 2014 dollars and by 2015 it had risen to $18,943.00 in 2014 dollars. The cost of a higher education in 35 years taking inflation into account has increased 2.5 times. Compare this to inflation-adjusted housing costs that have been almost flat, increasing just 19% from 1980 to 2015 when the bubble and housing crisis were eliminated. 3. Or compare to salaries that, except for the top 25%, have not increased over the same period of time. Looking at affordability in terms of minimum wage, it is clear that loans are becoming more necessary for anyone who wants to attend college or university. In 1981, a person earning minimum wage could work full-time in the summer and earn nearly enough to cover the annual costs of college, leaving a small amount that could be cobbled together with grants, loans, or work during the school year. 4. In 2005, a student earning minimum wage would have to work all year and spend all of that money toward the cost of her education to pay for 1 year of a public college or university. 5. Now think about this, there are roughly 40 million people with student loan debt somewhere over the $1.2 trillion mark. According to studentaid.gov, seven million of those borrowers are in default, that’s about 18%. Default is defined as 270 days past due on your student loan payments. Once in default, loan balances increase by 25% and are sent to collections. Collection agencies get a commission on the collected debt and are often owned by the same entity that originated the loans, ie Sallie Mae.

The student debt prison building.

Before 1976, student loans were cancelable in bankruptcy without any restrictions. Of course, if you look at the statistics from that time, there wasn’t a lot of student debt to speak of. When the US Bankruptcy Code was enacted in 1978, the ability to pay off student loans was reduced. Back then, in order for your loans to be paid off, you had to be paying for 5 years or prove that such payment would constitute an undue hardship. The rationale for reducing the discharge was that it would hurt the student loan system, as student debtors flocked to bankruptcy to have their debt discharged. The facts, however, did not support this attack. In 1977, only 0.3% of student loans had been paid off through bankruptcy. 6. Even so, the walls continued to close in on student debtors. Until 1984, only private student loans made by a nonprofit institution of higher education were exempt from forgiveness. 7. Next, with the enactment of the Bankruptcy Amendments and Federal Judgment Act of 1984, private loans from all nonprofit lenders were exempted from forgiveness. In 1990, the repayment period before receiving a discharge was lengthened to 7 years. 8. In 1991, the Emergency Unemployment Compensation Act of 1991 allowed the federal government to garnish up to 10% of the available pay of delinquent borrowers. 9. In 1993, the Higher Education Amendments of 1992 added the income contingent payment that required payments of 20% of discretionary income to repay Direct Loans. 10. After 25 years of repayment, the remaining balance was forgiven. In 1996, the Debt Collection Improvement Act of 1996 allowed Social Security benefit payments to be offset to pay off delinquent federal education loans. 11. In 1998, the Higher Education Amendments of 1998 repealed the provision allowing education loans to be paid off after 7 years of repayment. 12. In 2001, the US Department of Education began offsetting up to 15% of Social Security retirement and disability benefits to pay off delinquent federal education loans. In 2005, “the law change,” as we call it in the Bankruptcy field, further narrowed the discharge exception to include most private student loans. Since private student loans received bankruptcy cancellation protection, there has been no reduction in the cost of those loans. 13. If the justification for exempting student loans from forgiveness is that the cost to students of borrowing would skyrocket, this would seem to defeat that argument.

In the wake of the slow march toward loading our students with unbreakable debt, the government created a couple of ways to deal with government-backed student loans outside of bankruptcy. In 2007, the College Access and Cost Reduction Act of 2007 added income-based payment, allowing for a payment less than the income-contingent payment, 15% of discretionary income, and debt forgiveness after 25 years. 14. In 2010, the Health Care and Education Reconciliation Act of 2010 created a new version of income-based repayment that reduces the monthly payment to 10% of discretionary income with debt forgiveness after 20 years. 15. This new enhanced income-based repayment plan is only for borrowers who do not have pre-2008 loans. Additionally, those with delinquent loans will not qualify for income-based repayment unless they first rehabilitate those loans. If you are interested in seeing if your loans qualify for income-based repayment or income-contingent repayment, visit the gov student help desk. Unfortunately, none of these programs do anything to deal with private loans, a growing problem that currently hovers around $200,000,000,000.00 (two hundred billion) or about 16% of total student loan debt.

What can we do?

The cost of education is rising relentlessly, the need for higher education to earn a living wage is increasing, and the ability of our graduates to repay these loans is diminishing. Why does the cost of education exceed inflation so much? Why are state and local governments reducing the funds they used to dedicate to college students? These are questions that also need to be addressed. My focus is on the lack of availability of a real download option and how it is affecting the rest of the economy. This is a problem. On September 8, 2015, Michigan Congressman Dan Kildee introduced a bill in Congress aimed at reducing the burden on students and their families caused by the rising costs of education and the financial stress of student loans. 16. The proposed legislation would eliminate the discharge exception listed in 11 USC § 523 (a)(8). If you would like to express your opinion on this issue, call your congressman today and let him know where he stands on HR 3451

All the best,

Steven Palmer, Esq.

Licensed in WA and OH

1. http://www.eoionline.org/blog/the-great-cost-shift-college-was-once-a-ticket-to-opportunity-now-its-a-roadblock/

2.PL 85-864; 72 State. 1580

3. Case Schiller Home Price Index, adjusted for inflation

4. Student Debt: Bigger and Bigger, Center for Economic and Policy Research by Heather Boushey (September 2005).

5. Boushey (September 2005)

6. ENDING EXCEPTIONALISM IN STUDENT LOANS: THE CASE FOR RISK-BASED PRICING AND DISCHARGEABILITY, 126 Harv. L.Rev. 587

7. Financial Aid Point Org, Problems, Bankruptcy

8. Crime Control Act of 1990, PL 101-674, 11/29/1990

9. PL 102-164, 11/15/1991

10. PL 102-325, 7/23/1992

11. Debt Collection Improvement Act of 1996, PL 104-134, 4/26/1996

12. PL 105-244, 7/10/1998

13. 126 Harv. L.Rev. 587

14. PL 110-84, 9/27/2007

15. PL 111-152, 3/30/2010

16. http://www.ncbrc.org/blog/2015/09/15/proposed-bill-eliminates-student-loan-discharge-exception/