Student loans are generally not subject to garnishment, almost everyone knows that. There are some very special circumstances where student loan debt can still be discharged today, but it is a narrow exception that often requires fighting and spending money. We will discuss the current status of discharge eligibility in a later post.
The situation surrounding student loans and bankruptcies was not always so grim. It wasn’t that long ago that these loans were dischargeable. When they could be discharged, the cost of education was much lower and total student loan debt was a fraction of what it is today. Now that student loan debt is a $1,200,000,000,000,000 (one trillion two hundred billion) dollar problem that prevents people from buying homes or generally participating in the economy, it could be relieved with a little help.
A brief history.
Student loans were first introduced in America in 1958 as part of the National Defense Education Act. (1) These loans were offered to encourage students to pursue careers in math and science to keep us competitive with the Soviet Union. (2) In 1965, under the Johnson Administration, the Guaranteed Student Loan Program (Stafford Loan) was introduced. Over time, other loan programs have been established. The need for student loans has grown as grants to universities have declined over time. Take Ohio University, for example. In 1990, they received 25% of their budget from the state; by 2012, that had dropped to 7%. Faced with a lack of state funding, colleges and universities have increased tuition to make up for the cut in state funding.
Rising cost of education.
The inflation-adjusted cost of higher education over time looks something like this: in 1980, the average cost of room and board at a public institution was $7,587.00 in 2014 dollars, and by 2015 it had risen to $18,943.00 in 2014 dollars. The cost of a college education has increased by 2.5 times in 35 years when adjusted for inflation. Compare that to the inflation-adjusted cost of housing, which has remained almost flat, rising only 19% from 1980 to 2015, excluding the housing bubble and housing crisis. Or compare that to wages, which, except for the top 25%, have not increased over the same period. If you look at affordability in terms of the minimum wage, it is clear that anyone who wants to attend college or university is increasingly dependent on loans. In 1981, a minimum wage earner could work full time in the summer and earn nearly enough to cover his or her annual college costs, leaving a small amount to scrape together with scholarships, loans, or work during the school year. 4. in 2005, a student earning the minimum wage had to work all year and spend all the money on his education to afford a year at a public college or university. 5. 40 million people have more than $1.2 trillion in student loan debt. According to studentaid.gov, seven million of these borrowers are in default, or about 18%. Default is defined as 270 days after student loan payments are due. When payments are late, loan balances increase by 25% and are sent to collection agencies. Collection agencies receive a commission on the debt collected and are often owned by the same company that originated the loans, such as Sallie Mae.
The construction of the student debt prison.
Before 1976, student loans were dischargeable in bankruptcy without restriction. Of course, if you look at the statistics at the time, there was no student debt to speak of. With the passage of the US Bankruptcy Code in 1978, the dischargeability of student loans was restricted. At that time, you had to have paid for 5 years or prove that repayment would cause undue hardship to be discharged from your loan. The rationale for the reduced exemption amount was that it would hurt the student loan system, as debtors would flock to bankruptcy to get their debts forgiven. However, the facts do not support this attack. By 1977, only 0.3% of student loans were discharged in bankruptcy proceedings. Yet the walls continued to close in on student debtors. Until 1984, only private student loans made by a non-profit higher education institution were exempt from discharge. With the passage of the Bankruptcy Amendments Act and the Federal Judiciary Act of 1984, private loans from all non-profit lenders were exempt from discharge. In 1990, the repayment period for discharge was extended to 7 years. 8. In 1991, the Emergency Unemployment Compensation Act of 1991 allowed the federal government to garnish up to 10% of delinquent borrowers’ disposable wages. 9. In 1993, the Higher Education Amendments of 1992 introduced income-based repayment, requiring payment of 20% of discretionary income for Direct Loans. 10. 25 years after repayment, the balance was forgiven. In 1996, the Debt Collection Improvement Act of 1996 allowed social security benefits to be offset for repayment of delinquent federal education loans. 11. In 1998, the Higher Education Amendments of 1998 repealed the provision that allowed education loans to be cancelled after 7 years of repayment. 12. In 2001, the US Department of Education began offsetting up to 15% of Social Security disability and retirement benefits against the repayment of delinquent federal education loans. 13. In 2005, the “change in the law”, as we call it in bankruptcy, extended the discharge exception to most private student loans. Since private student loans have been discharged in bankruptcy, the cost of these loans has not decreased. 13 If the rationale for exempting student loans from discharge is that the cost for students to obtain them would skyrocket, this fact seems to invalidate that argument.
In the slow march of saddling our students with immovable debt, the government has created a number of ways to deal with government-backed student loans outside of bankruptcy. In 2007, the College Cost Reduction and Access Act of 2007 introduced income-based repayment, which allows for less than income-based repayment, 15% of discretionary income, and debt forgiveness after 25 years. 14 In 2010, the Health and Education Reconciliation Act of 2010 introduced a new version of income-based repayment that reduces the monthly payment to 10% of disposable income and provides debt relief after 20 years. 15 This new enhanced income-based repayment plan only applies to borrowers who do not have pre-2008 loans. In addition, people with delinquent loans are not eligible for income-contingent repayment unless they first rehabilitate those loans. If you would like to know if your loan qualifies for income-driven repayment or income-based repayment, please visit student aid dot gov. Unfortunately, none of these programs do anything about private loans, a growing problem that currently amounts to about $200,000,000,000.00 (two hundred billion) or about 16% of total student loan debt.
What can we do?
Education costs are rising inexorably, the need for higher education to earn a living wage is increasing, and the ability of our graduates to repay those loans is decreasing. Why are education costs so far above the rate of inflation? Why are state and local governments cutting back on the funding they used to provide for college students? These are questions that also need to be addressed. I focus on the lack of a true download option and how this puts a strain on the rest of the economy. This is a problem. On September 8, 2015, Congressman Dan Kildee of Michigan introduced a bill in Congress aimed at reducing the burden of rising education costs and the financial burden of student loans on students and their families. 16 The proposed legislation would eliminate the discharge exception in 11 U.S.C. § 523(a)(8). If you would like to speak out on this issue, call your Member of Congress today and let them know your position on H.R. 3451.