It is almost impossible to pay off student loans in bankruptcy. The legal criterion for a discharge is “undue hardship” but the statutory code does not specify what undue hardship actually is. So the magistrates in each district judge it. They look at “the totality of circumstances,” which is the legal term for looking at many factors in a person’s situation, assigning different weights to those factors and determining which way to guide the measure of justice. Usually, this means that the debtor must have a disability and is unlikely to generate enough income to pay off. If the debtor had a disability when he borrowed money for school, the disability usually must be greatly exacerbated. Bottom line, it’s hard and the results aren’t standard, which means they’re inconsistent.
My student loan debt is pretty overwhelming. I’m back in school part time taking LLM courses now, just so I don’t have to pay what I already owe because I can’t afford to pay and I’m trying to avoid defaulting until I hope my situation improves.
A recent bill introduced to the legislature proposing a discharge on student loan debt failed. Back in the earlier days, student loans were non-chargeable. As recently as September 2009, lawmakers were taking testimonials looking at whether a change would allow private student loans to be discharged at the very least. Private student loans are not the same as federal loans guaranteed by taxpayers. But even this proposal has significant opposition and does not appear to be a priority at the moment. Many more victims will probably need to be taken before attention and awareness can be raised to the immense suffering these easy loans are causing to an increasing number of people.
There are some organizations working to change the law and making compelling arguments. One argument is that lenders recklessly lend money to anyone with a Social Security card. Default rates on student loans are only tracked up to one year after graduation. This is absurd, because postponing, forgiving, and using credit and help from family can usually help people get through that first year. What could be more telling is the testing of default rates 4-5 years after graduation.
A view shared by many is that what has been happening in the mortgage lending industry for the better part of the past ten years has been, and continues to be, in the student loan industry. Financial institutions pool private student loan debt and sell it as investments. The next bubble may be waiting to pop. This will be especially true if the economic recovery has been so slow that there simply aren’t enough wages and/or jobs to allow those debts to be paid off. It is not an exaggeration to think that the private student lending industry is a major contributing factor to the unprecedented rise in the cost of education. What mortgage lending did for the real estate market could be what student loan lending does for the education market, contributing significantly to 10-20% increases in tuition fees year after year.
There are arguments that if you change the bankruptcy law to make it easier to pay off your student loan, people will benefit from borrowing and declaring bankruptcy soon after graduation. This can be addressed by creating a time limit, for example requiring student loans to be more than 5 or at least 7 years old. Lenders may also require a co-signature to better protect their investment. This may also mean that the prospective student and co-signer (usually a parent) will think deeply about the implications of religion.
Another argument is that if you make loans non-rechargeable, you will dry up funding for freshmen. Maybe that’s right. However, perhaps this should happen. Lenders are likely to be less strict about who gets loaned and how much money is available to students. Yes, some residents will be affected more than others, mainly low-income students. But, consider the impact of excessive borrowing on those same people now. As a result, a generation of poor people is rising. Arguably, it’s also a drag on the economy because these debtors have so little disposable income to make the purchases that create other jobs and ultimately benefit us all. If funding dries up, there is another possibility. Empty seats in classrooms could force educational institutions to do something that could benefit us all, lower tuition rates, making them more affordable. Supply and demand theory can drive this change.
Massive student loan debts cause tremendous hardship to ambitious, hardworking people who borrowed thinking they were making a smart choice and an opportunity to improve their lives. Unbeknownst to them, most of them seemed doomed to financial torment for life.