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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