It is now Critical that Bankruptcy Rights be Returned to Student Loans.

Lives are now being lost.

Two years ago, A husband and wife in Broken Arrow, Oklahoma committed suicide, and also took the lives of their 6 children. The family was crushed by student loan debt. They had previously filed bankruptcy, obviously believing that student loans (which comprised 94% of their debts) were dischargeable. They found out the hard way that student loans- unlike all other loans in the country- are uniquely non-dischargeable. They got all of the shame of a bankruptcy, and none of the relief.

In February of this year, Justin Mohn declared war on the Federal government, decapitated his father, a federal pensioner, and also apparently attempted to attack a federal facility in Pennsylvania. Mohn had sued the Department of Education unsuccessfully over his federal student loans in July, 2023, and lost.

What is going on, here? These tragic stories, and many more like them, have been documented, and these kinds of student loan related tragedies have increased, most pointedly over the past 3–4 years.

In order to understand the link between student loan debt and these horrible, gruesome acts, a little historical perspective is needed:

In the 1700’s, American colonists- including George Washington, Thomas Jefferson, Robert Morris, and others- were being treated poorly under debt- typically to British banks, trading companies, and other investors. Shortly after the Revolutionary War, it was Shays’ rebellion- a populist uprising against debt collectors- that convinced the Founders to create the US Constitution, where in Article I, Section 8, they call for uniform bankruptcy laws ahead of the power to raise an army, declare war, coin currency, and ahead of all the rights enumerated in the Bill of Rights.

Congress, however, began chipping this protection away, uniquely, from student loans beginning in 1976 and continuing through 2005. Today, both federal and private student loans are essentially impossible to discharge in bankruptcy. This has resulted in a viciously predatory, hyper-inflationary, lending system of nationally threatening proportions- precisely the sort of lending catastrophe that the Founders wished to avoid.

In the quarter century that bankruptcy rights have been essentially gone from federal student loans, the nation’s federal student debt tab has exploded- from roughly $100 Billion in 1998 to about $1.7 Trillion today. Instead of simply returning standard bankruptcy rights when it became apparent that the lending system had become dangerous and unstable, Congress instead foisted an alphabet soup of loan cancellation programs (ICR, IBR, PSLF, PAYE, REPAYE, SAVE, etc) on the citizens, all advertising loan forgiveness after years of payments.

All of these plans, however, have proven to be disastrous for the overwhelming majority of borrowers. Of the literally millions of people who tried to use these programs, more than 99% have been denied the cancellation promised at this point. They’ve been disqualified out of the programs (often despite their best efforts), and usually left owing far, far more than had they never tried in the first place. Even the $160 Billion in cancellations over the past 4 years represent only a small fraction of the people who I tried for these programs, and is almost inconsequential compared to the growth of the federal loan portfolio during the same time frame.

During these same years, the Department and its contractors fought tooth-, and-nail behind the scenes to keep bankruptcy protections gone from the loans. A leaked strategy memo from Sallie Mae in 2007 showed that the company’s highest legislative priority was keeping bankruptcy gone from student loans.

One borrower estimates that the non-profit federal contractor used to litigate bankruptcy claims for federal student loans, Educational Credit Management Corporation (ECMC), spent a quarter-million dollars to defeat his $5000 bankruptcy case, which would have set a dangerous precedent for the lending industry.

The “New Bankruptcy Process”, where the power of determination of “undue hardship” (an almost-impossible, unprecedented criterion for borrowers to meet to qualify for a discharge) was taken out of the hands of bankruptcy judges, and given to bureaucrats from the Departments of Education and Justice, has proven to be a cruel, expensive joke where a vanishingly small percentage of student loan borrowers in bankruptcy get a discharge (despite disingenuous claims to the contrary).

Without the threat of bankruptcy to contend with as all other lenders must, the Department of Education and its contractors have used their overwhelming administrative powers to NOT cancel loans, and abuse the borrowers to no end.

The Department of Education and its contractors have operated in the worst of bad faith, never had any desire or intention to actually cancel loans, and this purposeful bureaucratic bungling continues today.

The fact that older borrowers now outnumber younger borrowers by a wide margin, and owe far more despite having borrowed far less many years or decades ago- proves this strongly.

Interestingly, a wide range of opposition to returning bankruptcy rights to student loans has emerged over the years from NGO’s, advocacy groups, lobbying firms, etc, and they have come from both sides of the political aisle. In 2007, proponents of the Public Service Loan Forgiveness Program (PSLF) and Income Based Repayment (IBR) went to significant lengths to kill the push for the return of bankruptcy protections in favor of their “new and improved” cancellation programs. Both have proven to be blatant scams, like their predecessors. PSLF had a 99% disqualification rate, and only under overwhelming public pressure might this improve. Similarly with the Income based repayment, where 57% of the people in IBR were disqualified in just one year. The first cancellations (if any) under this program aren’t scheduled until 2027.

There is, frankly, a sordid and disturbing backstory to be told here about corrupted “student advocate” groups surreptitiously fighting against bankruptcy. Astroturf has overrun the student borrowers advocacy space.

With the threat of bankruptcy returned to federal student loans, however, this bad-faithed, cruel administration of the lending program will be forced to end at long last. With standard bankruptcy protections back in place, as they exist for all other loans, The Department of Education will be forced to behave with a minimal level of good faith (as all other lenders must), and ensure that both existing loan cancellation programs perform as advertised, and future cancellation actions actually happen. This should occur with very few people ultimately having to file, as is the case with all other borrowers for all other types of loans.

A bipartisan Senate bill, S. 2598, was well positioned to pass in the 2021–2022 congressional session. The bill would have returned bankruptcy protections to federal student loans with a ten-year waiting period, and required colleges to reimburse the taxpayer for a small- but not insignicant- portion the original loan amount in the event of a discharge.

The Democrats had been promising to return bankruptcy for decades, including in their 2016 and 2020 Party Platform.

Unfortunately, the Democrat sponsoring the bill, Senator Dick Durbin, chose to kill the bill at the end of 2022, despite having all the votes necessary to pass it.

Astonishingly, Elizabeth Warren, refused to voice support for this legislation, and on the day that the House was to have a hearing for its companion bill, Warren called a press conference to announce her own plans for future bankruptcy legislation with the sponsor of the companion bill. Minutes after her press conference, the hearing was cancelled. Elizabeth Warren actively killed this legislation, and the Democrats then lost the House of Representatives, thus killing any reasonable chance of returning bankruptcy protections to student loans. The Democrats betrayed the citizenry, blatantly.

He claimed this was because the Historically Black Colleges and Universities (HBCU’s) opposed the legislation and the “clawback” from the colleges it included. The fact, however, is that the Department of Education has never meaningfully enforced similar sanctions, and everyone involved knows they never would against the HBCU’s. It is likely that the HBCU’s were really just a critcism-resistant stand-in for ALL of the colleges, and probably many others who wished to keep bankruptcy rights gone from the loans.

Since then, the Democrats have removed all mention of returning bankruptcy rights to the loans from their party platform. Kamala Harris made zero mention of either cancelling loans, or returning bankruptcy rights to them in her 2024 Presidential campaign. Nancy Pelosi actually went to great lengths to kill President Biden’s feeble attempt at loan cancellation. This blatant betrayal gave 40 million distressed student loan borrowers nothing to vote for. And we saw the results.

So today, the people are stuck with a never-ending parade of pretend loan cancellation gimmicks that never happen, and this weaponized lending scam is now crushing yet another generation of unsuspecting Americans, whose only crime was attempting to better themselves through higher education.

Make no mistake: The student loan collection industry calls student loans the “golden unicorn” of the collection industry, and they would like nothing more than to see a mass default in the continued absence of bankruptcy rights and statutes of limitations. That is now happening.

The borrowers are being “served up” to them like “turkeys at the Thanksgiving dinner” (Elizabeth Warren’s words).

Ironically (and cruelly): Warren was one of the Senators who refused to support S.2598.

The people who perpetuated student loan cancellation hoaxes in years past -and who now would do it again- should rethink themselves very, very carefully. The stakes are far, far higher this time.

What has to happen: A bill just like S.2598 must be passed. Bankruptcy must be returned to student loans and the colleges- collectively- must be held financially responsible for discharges. Obviously, the obscenely wealthy colleges must shoulder the lion’s share of this cost. The colleges must share this cost among themselves according to their means.

If this unconstitutional injustice is allowed to stand, the dark forces that perpetuated it will be free- and very motivated- to extend it to other debts, like medical debt, credit cards etc. Frankly, there is nowhere this might stop until all consumer debt becomes essentially non-dischargeable. This is precisely the sort of tyranny that the Founders wanted to avoid. They are surely looking down, baffled.

The People are watching closely, too, and we’ve begun to see truly horrifying, life-ending tragedies like this and this happen over the past two years. This will get much, much worse, and quickly. It is now, quite literally, a matter of life and death.

The dark forces responsible for this had better check themselves. Lending systems fail from time to time, and no amount of vicious lawmaking can prevent it. Karma, and paybacks…as they say…are a bitch.

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