Much at Stake for Democrats with Student Loans and Bankruptcy.
They betrayed the people in ’08 and in the Lame Duck of ‘10. They’re on the verge of doing it again.
The Founders- including many who were being financially exploited by British banks, trading companies, and others- called for uniform bankruptcy laws ahead of the power to raise an army, declare war, and coin currency when they gave Congress its powers in the Constitution. Congress, however, began chipping this protection away, uniquely, from student loans beginning in 1976 when the industry planted false claims in the media that a significant number of borrowers were abusing the process. While we now know that this “crisis” existed only in the imagination of the student loan lobbyists, the tightening of the bankruptcy laws nonetheless continued over many years to where today, both federal and private student loans are largely impossible to discharge.
This, along with the creation of unprecedented, draconian collection powers have enabled widespread abuse of the borrowers at the hands of a lending industry which is now free to exploit with impunity, and most of all: without fear of the bankruptcy leverage that every other borrower for every other type of loan enjoys.
The predatory and hyperinflationary environment that resulted has pushed borrowers- and the entire lending program- over a cliff. In the 24 years that bankruptcy rights have been essentially gone from federal student loans, the federal portfolio has grown from roughly $100 Billion to about $1.6 Trillion today, which includes $141 billion hung around the neck of Texans of all political stripes. About $100 billion per year in interest alone is added in a typical year- for a loans that President Lyndon Johnson declare would be “free of interest.
Even before the Covid emergency, 85% of all federal borrowers- 37 million people- were underwater on their loans according to the former Chief Operating Officer of the program. Student debt in over a third of U.S. states now exceeds the entire state budget, and this is most pronounced in historically “red” states, like Georgia. Even with over two years of pandemic repayment pauses, total student loan debt has more than doubled since 2010.
Ominously, nearly 60% of all borrowers were not paying on their loans just before the Coronavirus hit, and this will increase dramatically when the loans are turned back on. Similarly, the default rate for 2004 borrowers is 40%, and this has surely increased, as average borrowing has roughly tripled since that time. At the extremes, people are now fleeing the country and even committing suicide where the inability to discharge student loans is a contributing factor.
This is precisely the sort of weaponized lending regime that the Founders wished to avoid. For all their faults, they were surprisingly prescient on the need for uniform bankruptcy rights.
The Democrats have- at least rhetorically- championed the return of this protection since at least 2005, but have failed to deliver it repeatedly, despite having numerous opportunities to do so. In 2008, the Blue Dog Democrats banded together to kill an amendment that would have returned bankruptcy to private student loans. Even in the lame duck session of 2010 where they held both House and Senate, Democrats in Congress chose not to use their power to return this right.
As the Trump era dawned, the Democrats appeared to finally get serious about returning bankruptcy. In both 2016 and 2020, they included the return of bankruptcy to student loans as planks in their Party Platform, and nearly all democratic presidential candidates in the last presidential race- most notably Joe Biden (who was instrumental in their removal as a Senator)- included this in their campaign agendas. The Democrats in Congress, however, have once again failed to use their rare control of both House and Senate, and return bankruptcy to student loans to this point, and like in 2010, they now face the end of their control.
While few of the 37 million distressed federal borrowers want- or will need to file for bankruptcy when the right is returned, all of them understand the absolutely critical need to have the leverage back. They were deeply disappointed with Biden’s broken presidential campaign promise to “eliminate” the public student loan debt of people making less than $125,000, and their resentment of the unimpressive-turned-unlikely, legally dubious loan cancellation gimmick that Biden and the democrats rolled out just before the mid-terms is turning to palpable anger as it appears less and less likely. The borrowers feel used and tricked by the Democrats for their votes.
Make no mistake: The recent Biden Administration announcement of a new bankruptcy process does absolutely nothing to remove the impossibly high legal bar that borrowers must clear for a discharge- it only takes the process from open court, and hides it in the bureaucratic bowels of the Department of Education where staff- or more likely contractors- who have been defeating borrowers in court for years- will continue to deny the vast majority the bankruptcy rights that all other citizens- for all other loans- rightfully enjoy.
There is bipartisan legislation in both Senate (S.2598) and House (HR.9110) that will return bankruptcy to federal student loans with a ten-year waiting period, and a (largely token) clawback provision from the colleges. Nearly all public opposition to these bills- and returning bankruptcy generally- has evaporated. Numerous conservatives have called for returning bankruptcy to student loans. Republicans John Cornyn and Josh Hawley have even cosponsored the legislation in the Senate with Dick Durbin (sponsor).
The Democrats simply must pass this legislation if they are to retain (regain) their credibility with these 37 million voting citizens, and prevent the carnage that will ensue when loan repayment resumes in the coming, feckless congressional session.
Much is at risk here- including the legitimacy of the entire lending program- and prominent Senators like Elizabeth Warren, who have (astonishingly) refused to voice support for this legislation need to put all other concerns and aspirations aside, and get this done.
