This past Friday I attended the ABI’s (American Bankruptcy Institute) Student Loan Debt Crisis Symposium. It was…um…interesting. I say that because I came in with a unique perspective, being in the trenches and all. For me, it was more review and less of an informative or “problem solving” discussion, though it certainly did end with a bang (I’ll get to that).
Two terms struck me that were worth jotting down . Terms that really illustrate the student loan crisis.
“Lost Economic Generation”
What an appropriate term to describe current student loan borrowers. With all the recent press and studies showing the dire consequences student loan debt has on the economy, this term really sums it up.
“Debt without Diploma”
Another term, mentioned by a President of a small college. A problem that also has dire consequences. This came out of a discussion about college readiness and the idea that not all kids should go to college. It’s one thing to have a mountain of debt because of a degree which MIGHT eventually help pay back the debt. It’s another to have debt and nothing to show for it.
Interesting Discussion of Brunner
Brunner is the test used by most courts (but not in the 1st or 8th Circuits) to determine if a borrower meets the standards of “undue hardship” to have student loans discharged through bankruptcy. One of the presenters on the panel was a bankruptcy Judge from Atlanta. He hit the nail on the head when discussing why the Brunner test is so poor: it was a terrible case to begin with. It was not the case that should have been the poster child for undue hardship, yet here we are, 27 years after the Brunner decision and we’re all still reeling from it. This Judge, and another from South Florida, conveyed that Brunner needs to be changed. They also believe that it is worth attempting to discharge loans because they have seen quite a few borrowers who likely would qualify for discharge.
Other Bankruptcy Maneuvers
Is it possible to cure a default Federal student loan via a Chapter 13 bankruptcy? Some experienced bankruptcy attorneys have always thought so. Unfortunately, there is case law out of the 7th Circuit that says no. After a short discussion with an attorney I am friendly with, we both realized that even if it were possible, it wouldn’t necessarily be feasible as it would cost more over the long run.
I also had a wonderful discussion, again with the same attorney, about what happens to Federal student loans during a bankruptcy. I wrote about this a few weeks ago. After reviewing the code, it would seem that maybe the industry is getting it wrong (no surprise) but has yet to be challenged properly. It would seem that payment plans should be allowed, in deed, should not even be affected by the filing. After all, placing the loan in to a forbearance because of the bankruptcy filing would be taking negative action due to the filing, and negative actions are not allowed. Chew on that for awhile. Another issue relevant to this is the clause that causes private student loans to default upon bankruptcy filing. Is that really legal? Maybe not. It’s time to start fighting this issue, especially where the non-filing signer/co-signer is still making (or attempting to make) payments.
Repeal 11 USC 523(a)(8)
The day ended with a lively discussion of what affect, if any, would the repeal of the bankruptcy discharge exemption have. Would there be a massive run for bankruptcy by all the borrowers? Yes, and no. In my experience, many folks do not want to file bankruptcy if they don’t have to. On the other hand, what choice do folks have when lenders (usually private student loan lenders) refuse to offer affordable payments?
The Boom in the Room
During the above mentioned discussion, the creditor attorney on the panel mentioned how surprised he was that it wasn’t just borrowers who didn’t know all their options, but also the debtor attorneys. He suggested that it might be malpractice for debtor attorneys to advise their clients about student loans when the attorneys don’t actually know all of the options. He was amazed that an attorney would file an action to discharge a Federal student loan for a totally disabled person, because there is an administrative remedy for that. The person simply needed to apply for Total and Permanent Disability discharge, no bankruptcy needed! This attorney was further amazed that debtor attorneys had no idea about income driven repayments or how to help borrowers get their Federal loans out of default. The processes are so simple, he said. And that’s when it happened…
While the creditor attorney was trying to respond to another student loan lawyer in the room (who presented earlier that day), I jumped in on the conversation. My hand went up, “I’m sorry, I’ve gotta comment on this!” The explosion happened. The reason, I explained to the creditor attorney, and all those now listening intently, why so many borrowers and their attorneys had no idea how to deal with student loans, was because the industry doesn’t do its job. It’s the servicer’s job to make sure borrowers don’t default, yet many borrowers do default. It’s the debt collector’s job to help borrowers get out of default, yet they fail. The proof of servicers failing was presented earlier in the day. Out of 34 million borrowers, 5.5 million are in deferment or forbearance, yet only 2 million are in an income driven repayment plans. Shouldn’t that be reversed? Why do so many folks need forbearance or deferment when the income driven plans are likely affordable. After all, in order to qualify for a forbearance or deferment, the borrower must demonstrate a hardship; the same hardship that qualifies the borrower for an income driven payment plan!!
Why the explosion? Because, up until this point, which was nearly the end of the day, only one presenter pointed a finger at the industry. No one else looked at the industry. No one else looked at the lack of oversight by the Department of Education. From where I sit, I know who’s got a hand in this crisis – the very people who are supposed to help avert it.
Some presenters called this a repayment crisis, not a loan crisis. Well yes, people have problems finding affordable repayment plans, and again, I point to the industry. Others said there should be more financial literacy classes and information. Sorry, I don’t see that being a solution. Those who already have debt will not be assisted by this. As most bankruptcy attorneys will tell you, debtor financial literacy courses, mandated by the 2005 change in bankruptcy law, has done little to assist debtors.
Something needs to be done, that much is obvious. What that “something” is remains to be seen. There are economic models that could solve this easily. There are also simple legislative changes that could end suffering for millions of borrowers. Which brings us to mid-term elections. Find out which of your Congresspersons is up for election and ask where he/she stands on student loan reform.