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The History of Student Loans in Bankruptcy
Student loans are basically non-dischargeable, almost everyone knows that. There are very specific circumstances where, even today, you can get your student loan debt forgiven, but this is a narrow exception that often requires a fight and money to fight. We will discuss the current state of the landfill in a future article.
The landscape surrounding student loans and bankruptcy hasn’t always been so bleak. Not so long ago, these loans were dischargeable. Back when they were discharged, the cost of an education was much lower, and total student loan debt was a fraction of what it is now. With student loan debt currently being a $1,200,000,000,000.00 (one trillion two hundred billion) problem preventing people from buying homes or participating in the economy in general, with a little help , they can become releasable again.
A brief story.
Student loans didn’t really come into existence in America until 1958 under the National Defense Education Act. 1. These loans were offered as a way to encourage students to pursue math and science studies to keep us competitive with the Soviet Union. 2. In 1965, the Guaranteed Student Loan or Stafford Loan program was launched under the Johnson administration. Over time, additional loan programs have emerged. The need for student loans has become greater as the grants universities receive have diminished over time. Take the state of Ohio for example. In 1990, they received 25% of their budget from the state, in 2012 this percentage had fallen to 7%. In the absence of state money, universities and colleges increased tuition to cover the reduction in state money.
The rising cost of education.
The inflation-adjusted cost of higher education over time looks like this: In 1980, the average cost of tuition at a public institution was $7,587.00 in 2014 dollars, and in 2015 it had increased to $18,943.00 in 2014 dollars. The cost of a higher education in 35 years taking into account inflation was multiplied by 2.5. Compare that to inflation-adjusted housing costs that remained virtually unchanged, rising only 19% from 1980 to 2015, once the housing bubble and crisis were eliminated. 3. Or compare to wages which, with the exception of the top 25%, have not increased over the same period. When it comes to affordability in terms of minimum wage, it is clear that loans are increasingly needed for anyone wishing to attend university or college. In 1981, a minimum-wage earner could work full-time in the summer and earn almost enough to cover their annual college fees, leaving a small amount they could accumulate through grants, loans, or work during the year. school. 4. In 2005, a student earning minimum wage would have to work all year and spend all that money on the cost of his education to afford a year at a public college or university. 5. Now think about this, there are about 40 million people with student loan debt over $1.2 trillion. According to studentaid.gov, seven million of these borrowers are in default, or about 18%. Default is defined as being 270 days behind on your student loan payments. Once in default, loan balances increase by 25% and are sent to collections. Collection agencies take a commission on debt collected and are often owned by the very entity that originated the loans, i.e. Sallie Mae.
The student debt prison building.
Before 1976, student loans were discharged in the event of bankruptcy without any constraint. Of course, if you look at the statistics from that time, there wasn’t much student debt to speak of. When the US Bankruptcy Code was enacted in 1978, the ability to repay student loans was reduced. Back then, to have your loans canceled you had to be in repayment for 5 years or prove that such repayment would constitute an undue hardship. The rationale for restricting discharge was that it would hurt the student loan system, as student debtors flocked to bankruptcy to get their debt discharged. The facts, however, did not support this attack. In 1977, only 0.3% of student loans went bankrupt. 6. 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. 7. Then, with the enactment of the Bankruptcy Amendments and the Federal Judiciary Act of 1984, private loans from all non-profit lenders were excluded from the discharge. In 1990, the repayment period before a discharge could be received was lengthened to 7 years. 8. In 1991, the Emergency Unemployment Compensation Act of 1991 allowed the federal government to garnish up to 10% of the available wages of defaulting borrowers. 9. In 1993, the Higher Education Amendments 1992 added an income-contingent reimbursement that required 20% of discretionary income to be paid for direct loans. 10. After 25 years of repayment, the remaining balance has been forgiven. In 1996, the Debt Recovery Improvement Act of 1996 allowed Social Security benefit payments to be offset against defaulted federal student loans. 11. In 1998, the Higher Education Amendments 1998 removed the provision allowing student loans to be canceled 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 to pay off defaulted federal student loans. In 2005, “the law change,” as we call it in the bankruptcy field, further narrowed the exception to discharge to include most private student loans. Since private student loans have been protected from discharge in the event of bankruptcy, there has been no reduction in the cost of these loans. 13. If the rationale for excluding student loans from the discharge is that the cost to students of obtaining loans would skyrocket, this fact would seem to destroy that argument.
In the wake of the slow march toward unbreakable student debt, the government has created a few ways to handle government-backed student loans outside of bankruptcy. In 2007, the College Access and Cost Reduction Act of 2007 added income-based repayment which allows for lower repayment than income-tested repayment, 15% of discretionary income, and debt forgiveness after 25 years. 14. In 2010, the Health Care and Education Reconciliation Act 2010 created a new version of income-tested reimbursement, reducing the monthly payment to 10% of discretionary income with debt forgiveness after 20 years . 15. This new and improved income-based repayment plan is only for borrowers who do not have pre-2008 loans. In addition, those with defaulted loans will not be eligible for income-based repayment. unless they rehabilitate those loans first. If you would like to know if your loans are eligible for income-based repayment or income-contingent repayment, please visit the student help point. Unfortunately, none of these programs do anything to deal with private loans, a growing problem currently at about $200,000,000,000.00 (two hundred billion) or about 16% of total student loan debt.
What can we do?
The cost of education is rising relentlessly, the need for a higher education to earn a living wage is only growing, and the ability of our graduates to repay those loans is shrinking. Why is the cost of education so much higher than inflation? Why are state and local governments cutting the funds they used to spend on students? These are questions that also need to be answered. I focus on the unavailability of a real dump option and how it weighs on the rest of the economy. It’s a problem. On September 8, 2015, Michigan Congressman Dan Kildee introduced a bill in Congress aimed at reducing the burden on students and their families caused by rising education costs and the financial stress of student loans. 16. The proposed legislation would remove the discharge exception listed in 11 USC § 523(a)(8). If you want to have your say on this issue, call your convention delegate today and let them know where you stand on HR 3451
All my wishes,
Steven Palmer, Esq.
Licensed in WA and OH
2. PL 85-864; 72 State. 1580
3. Case Schiller house price index, inflation adjusted
4. Student Debt: Growing, Center for Economic and Policy Research by Heather Boushey (September 2005).
5. Boushey (September 2005)
6. ENDING STUDENT LOAN EXCEPTIONALISM: THE CASE FOR RISK-BASED PRICING AND FREEDOM, 126 Harv. L. Rev. 587
7. Point Org Financial Aid, Questions, Bankruptcy
8. Crime Control Act of 1990, PL 101-674, 11/29/1990
9. PL 102-164, 11/15/1991
10. PL 102-325, 7/23/1992
11. Debt Collection Improvement Act of 1996, PL 104-134, 4/26/1996
12. PL 105-244, 7/10/1998
13. 126 Harvest. L. Rev. 587
14. PL 110-84, 9/27/2007
15. PL 111-152, 30/03/2010
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