Is Student Loan Debt the Next Debt Crisis? Well, duh…

28 Apr Is Student Loan Debt the Next Debt Crisis? Well, duh…

The problem of student loans in bankruptcy is the bane of my existence as a bankruptcy lawyer. Sometimes it’s just the amount of the debt–a client who incurred $100,000 to get a degree that qualifies him to make $24,000 a year. Sometimes it’s the combination of the student loan debt with other debt–a client who has to choose between making mortgage payments or student loan payments, or buying groceries, or medicine, or keeping the lights on. Bankruptcy lawyers, and their clients, have been dealing with this for a while, but it has been much in the news lately. It’s about time.

Two years ago, for the first time, total outstanding student debt in the United States topped $1 trillion, according to the National Association of Consumer Bankruptcy Attorneys.

That’s more than what Americans owe on their credit cards.

“Take it from those of us on the front line of economic distress in America: this could very well be the next debt bomb for the US economy,” said [National Association of Consumer Bankruptcy Attorneys]president William Brewer.

“The reason: Students and workers seeking retraining are borrowing extraordinary amounts of money through federal and private loan programs to help cover the rising cost of college and training,” he added.

Let me repeat: Americans owe more on their student loans than on their credit cards.

That translates to graduates who make the equivalent of a mortgage payment to student loan debt–so they will never be homeowners. Or teachers who pay half their income in student loan debt payments. Or parents who pay their kid’s student loan debt instead of contributing to 401k plans.

John Rao, vice president of the National Association of Consumer Bankruptcy Attorneys, noted in a statement how student debt can have knock-on effects — delaying, for instance, decisions on marriage and starting a family.

It follows that those saddled with crippling student loan debt won’t have as much to spend on consumer goods, won’t be as entreprenurial, won’t be able to save, won’t be able to pay for health care, won’t be able to send their children to college–all of which affects our national economy, not to mention our national identity. After all, if Americans can’t pass along the American dream to the next generation, who do we become?

NACBA, Occupy protesters, and others have been working to bring attention to the looming crisis that is student loan debt. Now President Obama is using the considerable power of his bully pulpit to do the same.

The president and his Department of Education deserve credit for keeping the heat on student loan and college cost issues, and not just at campaign time. Their most important move was probablythe government takeover of the student loan market. As of July 1, 2010, all federally subsidized student loans — about 80% of the total — have been originated by the Department of Education. The deal ended billions of dollars in unnecessary subsidies to lenders like Sallie Mae and, in theory at least, empowered the government to set repayment terms friendlier to student lenders.

And, says the president, he didn’t just get a policy briefing on the issue. He and the First Lady have the real-world experience (and probably some battle scars) to prove it:

“When we graduated from college and law school, we had a mountain of debt. When we married, we got poor together,” said Obama, who will turn 51 in August. “We only finished paying off our loans, check this out: I’m the president of the United States. … We only finished paying off our student loans about eight years ago. That wasn’t that long ago.”

I think that bears repeating. He’s the President of the United States, for the last four years, and it has only been eight years since he paid off his student loan debt.

Any help with student loan debt is better than nothing, but there is a better, bolder solution to the problem:

There is a simpler way to cut the Gordian knot of rising debt and college costs, one that would help desperate graduates in the short term and lower the cost of college in the long term. The answer is bankruptcy relief for both federal and private student loans.

My friend and fellow BLN contributor Russ DeMott put together a fun and instructive primer on the history of student loan discharge through the years(I know that sounds unlikely, but trust me)pointing out the pendulum swing of this area of the law:

In 2005, Congress passed our current Bankruptcy Code, the Bankruptcy Abuse Prevention and Consumer Protection Act, otherwise known as BAPCPA. (Spoiler alert: There is nothing in this piece of legislation protecting consumers.) The 2005 Code made evenprivatestudent loans essentially non-dischargeable and subject to the “undue hardship” (you’re very, very disabled) standard.

In 2005 it became easier to discharge federal and state income tax debt than PRIVATE student loan debt

Think of that for a moment. Congress (part of the federal government) actually made it easier to discharge debt owed to the IRS (also part of the federal government) than debt owed toprivatestudent loan companies (not part of the federal government, but having really good lobbyists).

What this means is that the IRS needs a freakin’ lobbyist! And…

It also means that we’ve officially arrived at Crazy Town.

And the current extreme of no student loan discharge in bankruptcy comes at the worst possible time, given our economic stresses, job market, and the relentless pressures created by demand for degrees and for-profit educational institutions. Crazy Town, indeed.

Like Russ, I advocate a Middle Way for student loan discharge. It’s simple, it’s quick, and it makes sense. It would also be easy to administer. If you have been struggling to pay your student loan debt for a number of years, you get to discharge it in bankruptcy. Can you go to medical school, pay for it with student loans, and then discharge that debt before you start your six-figure job? No. But there needs to be a middle ground, a common sense place that allows someone who is essentially enslaved to student loan debt to get some relief.

Since this post has pretty much gone on forever, I’m going to come back to this topic in my next post, and talk about why it makes sense to discharge some student loan debt, and why the “hardship discharge” provisions in the current law aren’t working.

Photo: iStock/RonBailey

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