A Two-Step Solution To The Student Loan Crisis
Due to legal decisions about how to structure the rules governing student debt, student loans stay forever, are virtually impossible to discharge under hardship, churn fees when they go bad, and creditors can access anything, including Social Security, in their attempts to be repaid. This is significantly more strict than the rules for other kinds of debt. Here’s a great way to describe the legal frame we use to treat student loans, from Elizabeth Warren in 2007: “Why should students who are trying to finance an education be treated more harshly than someone who negligently ran over a child or someone who racked up tens of thousands of dollars gambling?”
So what’s the solution? There’s a short-term and a long-term problem. The long-term problem, in my mind, can only be solved by unapologetically embracing the promise of a “public option”: free public universities that are capable of constraining cost inflation. This requires us to also face and resist the corporatization and privatization of our existing public universities.
But that doesn’t get us out of the current situation. What can be done? I propose two things:
1. Party Like It’s 1989
Instead of being so bold as to ask that people trying to invest in themselves, and ultimately the country, are treated as fairly as someone who negligently ran over a child, I’m just going to suggest we just do a mulligan on the 1990s and 2000s student loan “reforms.”
Here’s a quick, high-level history of student loans and the bankruptcy code, courtesy of University of Illinois law professor Bob Lawless:
In 1976, Congress first added an exception to the bankruptcy discharge dealing with student loan debt. That exception was continued in the 1978 Bankruptcy Code, and the exception was expressly limited to student loans from a governmental unit or nonprofit institution. Even then a student loan could be discharged if more than five years had passed since the loan first became due (typically after graduation) or if the debtor could show payment of the student loan would cause undue hardship, which is a difficult burden to show. In 1990, five years was changed to seven years and in 1998 was dropped altogether, leaving undue hardship the only reason a court could discharge a student loan from a governmental unit or nonprofit institution. As part of the 2005 changes to the U.S. bankruptcy law, Congress again amended the student loan discharge exception to allow even loans from for-profit lenders to be excepted from the bankruptcy discharge.