Why returning Bankruptcy Protections is critical for solving the Student Loan Problem.
The removal of constitutional bankruptcy rights is the core issue.
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. In fact, the issue of debt was so concerning to the nation’s Founders, 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.
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 24 years 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 $1.6 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, IDR, IBR, PSLF, PAYE, REPAYE, etc) on the citizens, all advertising loan forgiveness after years of payments.
They have all 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.
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. To this day, the Department of Education regularly opposes and defeats student loan borrowers in bankruptcy court. 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.
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 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 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 “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. For example: 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 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 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, 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 small- but not insignicant- 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 weaponized lending scam will crush 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 is drooling at the thought of the repayment pause ending, and bankruptcy protections remaining gone from the loans. The collection industry calls student loans the “golden unicorn” of the collection industry, and they would like nothing more than to see a mass default, which is essentially an inevitability when payments resume. As long as the leverage of bankruptcy remains gone, the people will be served up to them like “turkeys at the Thanksgiving dinner” (Elizabeth Warren’s words).
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. 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.
