Meaningful Student Loan Cancellation Will Only Happen when Bankruptcy Rights are Restored.
Loan cancellation and bankruptcy are not competing concepts. They are simpatico, and in fact, the latter depends upon the former.
During the 1700’s, American colonists- including George Washington, Thomas Jefferson, Robert Morris, and others- were being treated horribly under debt- typically to British banks, trading companies, and other investors. In fact, the issue of debt was so concerning to the nation’s Founders, that that in Article I, Section 8 of the U.S. Constitution, they call for uniform bankruptcy laws ahead of the power to raise an army, declare war, and coin currency.
The Congress of 1976 (and subsequent Congresses through 2005) stripped this protection uniquely from student loans. Today, we see the consequences; a viciously predatory, hyper-inflationary, lending behemoth which has grown to nationally threatening proportions. This is precisely the sort of lending catastrophe that the Founders wished to avoid.
In the 25 years that bankruptcy rights have been essentially gone from federal loans, the Department of Education and its beltway contractors have trotted out an alphabet soup of cancellation programs (ICR, IDR, IBR, PSLF, PAYE, REPAYE, etc), all advertising loan forgiveness after years of payments. They have all proven to be cruel jokes. Of the literally millions of people who have tried since the early 90's, more than 99% were denied the cancellation promised. They were 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.
During these same years, the Department and its friends (like Sallie Mae, ECMC, and others) 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. To this day, the Department of Education regularly defeats student loan borrowers in bankruptcy court, and writes legal briefs about how returning bankruptcy rights would “imperil” the lending system. One borrower I know estimates that ECMC spent a quarter-million dollars to defeat his $5000 bankruptcy case, which would have set a dangerous precedent for the lending industry.
The Department of Education and its contractors have operated in the worst of bad faith, and never had any desire or intention to actually cancel loans. This continues today.
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 fact that borrowers over the age of 50 now outnumber those under the age of 25- and owe triple what the younger group owes despite having borrowed far less many years or decades ago- proves this strongly.
Interestingly, a wide range of opponents to returning bankruptcy rights to student loans have emerged 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, exactly like their predecessors. PSLF had a 99% disqualification rate, and only under overwhelming public pressure might this improve. In one year alone, 57% of the people in IBR were disqualified, and 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 “student advocate” groups surreptitiously fighting against bankruptcy, but that is for another article, another time.
Today, we see yet another round of loan cancellation programs being run up the flagpole by the same beltway crowd. After a grassroots petition calling for total federal loan cancellation by executive order surpassed 500,000 signatures in 2020, Elizabeth Warren (who taught bankruptcy at Harvard University), proposed “Up to $50,000” in student loan cancellation by executive order. This proposal, however, is tricky from the outset. “Up to $50,000” could mean anything, and the Biden Administration has indicated a strong resistance to cancelling loans by executive order. They are, instead, deferring to Congress to pass legislation that would supposedly achieve $10,000 in loan cancellation.
It is obvious that whatever might result from these proposals, whether through legislation or executive order, will be vulnerable to the same bureaucratic weakening, and will result in almost no cancellation for almost everyone, and absolutely no cancellation for many. Only a fool, or someone with no knowledge of history would expect anything different.
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 around 40 million distressed/underwater borrowers in the country, the prospect of 20+ million people overwhelming the bankruptcy courts will compel meaningful administrative loan cancellation, and also ensure that existing loan forgiveness programs perform as advertised. 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, is well positioned to pass this congressional session, will return bankruptcy protections to federal student loans with a ten-year waiting period, and require colleges to reimburse the taxpayer for a portion the original loan amount in the event of a discharge. If this bill passes, there will be hope of meaningful loan cancellation actually happening.
If not, then the people will be stuck with yet another pretend loan cancellation gimmick, and this untethered, unconstitutional, weaponized lending scam will be free to crush yet another generation of unsuspecting Americans, whose only crime was attempting to better themselves through higher education.
The people who perpetuated this loan cancellation hoax in years past -and who now would do it again- should rethink themselves very, very carefully. The stakes are far, far higher now. The Founders are watching. The People are watching closely, too, and we won’t be fooled again.
If this concerns you: call both of your senators right now, and tell them to cosponsor S.2598.
