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.
Thank you. I have never read such an accurate breakdown of the student loan debt crisis, which I will now start referring to as the student loan repayment crisis.
Excellent analysis and suggestions!
What are the chances they will ever repeal 11 USC 523(a)(8)? I’d be first in line at the BK court.
Slim to none when it comes to Federal loans. On the other hand, I think the private student loan exemption will be removed in the next few years – depending on mid-term elections.
1. Is the test in the 1 & 8th circuits more favorable than Brunner? If so, what does it take to establish domicile? Or are there onerous rules to discourage forum shopping?
2. This: “[The creditor attorney] 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! ” That is incredibly powerful information. With 10 million US persons on disability, there must be tens of thousands of student loan borrowers who would qualify from this relief (I assume that the qualifications for SSD payments are analogous to discharge from student loans — so are they? )
3. I congratulate you on your niche, your blog, your practice area, Josh.
Great questions Attorney Parent. Here are my answers:
1. Yes, the 8th and 1st are more favorable. One big advantage is that these circuits do not have a requirement to show good-faith payments. Outside of those circuits, an affordable payment based on income (even as low as zero) could undue the debtor’s argument. While the debtor will likely not make a dent in the loan, the Court is reluctant to discharge it.
2. Let’s clarify how easy/hard it is to discharge a loan due to disability, because the guidelines are NOT the same as SSDI. The administrative remedy is for those who are totally and permanently disabled; the borrower cannot work. Many folks who collect SSDI are not totally disabled, only partially. If there is a possibility that the borrower can work, the administrative discharge is not available. However, a limited stream of income because of the partial disability could be an excellent argument for a bankruptcy discharge. However, see my answer to your first question.
3. Thanks. I didn’t set out to do this, but hey, someone has to.
This is so true. A friend filed for Chapter 7 and got relief from her debts, except her student loans. During walking through the Chapter 7 maze, she found some difficult to understand language about filing Chapter 13 for student loan relief. She filed for Chapter 13 (at a reduced filing fee) only to be told that Bankruptcy Judges have no control over student loans, and she should continue making her $5 a month payment (you are seeing correctly $5/mo). Of course her student loan balance, a few years ago, was almost one million dollars. Needless to say, most of this amount was attributable to accrued interest. Well, you guessed it, she will go to her grave owing millions of dollars in student loans. A bus load of suffers should drive up to the Hill and ask for legislative relief, which I feel would be a waste of time.
There is one major error which I must point out. She will not necessarily go to her grave with this loan. A payment of just $5 tells me she is on an income driven repayment. Those plans come with automatic forgiveness after 25 years. If she lives that long, the remaining balance will be forgiven. She will survive the duration of the loan on just $5. Perhaps she has an argument for discharge via BK because really, what’s the point of paying $5 for 25 years? It probably costs more in administrative fees to keep the loan alive.
I see student loan lending similar to the predatory lending of the mortgage industry. Student loan lenders make loans that they know that some borrowers most likely will never be able to pay back due to the borrowers major (prospective income) or level of debt incurred. However, lenders continue to make the loans nonetheless because either the loss is guaranteed by the U.S. Government or there is no statute of limitations to collect (private lenders). More importantly, the schools are also a willing participant in the lending cycle because the schools never suffer a loss if the students default, which is similar to the mortgage industry of the last real estate crisis. Question this: What would happen if student loan lending was capped to reflect a students reasonable prospective earnings or limit the term of loan repayment. This would put the schools financial model upside down resulting in more affordable tuition??
I have to make a few corrections, though your overall premise about predatory lending is not far off.
First, as of 2010, the only place to get a Federal student loan is from Dept of Ed. And even before that, Stafford loans are capped. The loans that got out of control (and still are) would be the PLUS loans, where there is no real cap. However, Fed loans are not all that bad since there is income driven repayment that comes with automatic forgiveness. It’s counter intuitive for any financial savy folk, but it is an option – a very good one.
Second, and a very important myth I must bust, private student loans ARE SUBJECT TO STATUTE OF LIMITATIONS! Yes, you read that right, private lenders ARE subject to state SOL. If a lender doesn’t sue before the SOL expires, there is NOTHING they can do. And yes, there are quite a few folks I’ve seen not get sued.
Third, schools do suffer, but it is minimal. If Perkins loan defaults go to high, a school can lose its eligibility for the Perkin’s program. There is talk of how to make school more accountable. Right now it focuses on the for-profits since they have a much higher default rate.
Now to your question: would capping rates based on reasonable prospective earnings help? NO, because then everyone would major in the most lucrative major there was. Suddenly we would see a dearth of anthropology and philosophy majors. I see that kind of cap failing before it ever gets to a bill. Limit the term of loan repayment? They already are. And again, with income driven repayment, if the loan isn’t paid in 25-years, the balance is forgiven. OK, the school has no skin in the game here, but the gov’t does. Perhaps this is the push needed to start capping loans. Of course the downside is, how would the middle class fund higher education? Remember, schools are suffering too since many states have severely reduced funding (some now get as little as just 5% of their budget from their state).
I’ve been practicing bankruptcy law for nearly 20 years and have filed thousands of case during that time. I’ve never seen the student loan situation as bad as it is now. It’s so bad I immediately registered for the ABI Symposium when it came out and flew from Nebraska to Washington DC to attend. Thankfully I sat next to you are learned more from you than most of the speakers!
I am now seeing new clients under 30 years of age earning $12 per hour and owing $160,000 of private student loans co-signed by parents. If it were just one new client I would dismiss it as unusual, but I’m seeing these people routinely. Something has really changed, and the 2005 bankruptcy “reform” law that made private loans non-dischargeable in bankruptcy is now starting to show its ill effects. I’m seeing too many young clients with no hope of a future for loans they now admit they never should have taken. They thought they would land good jobs but now feel used.
I would agree with your comments about bankruptcy attorneys–they generally do not have a clue as to how to handle these debts and just tell clients there is nothing that can be done. That is not acceptable.
One practice point to consider. If the Statute of Limitations has run but a borrower now files chapter 13, the payments in a 13 to the student loan claims may reset the statute of limitations. So, bankruptcy attorneys may be committing malpractice by not objecting to claims of student loan creditors where the SOL has expired. Few bankruptcy attorneys object to unsecured claims since they are typically discharged and therefore don’t matter, but not so with student loans.
Thanks Sam. It was a pleasure meeting you in DC. You bring up a great point about POCs.
Yes, the ability to discharge student loans in bankruptcy has certainly changed since I started practice in 1982. Private student loans (if they even had them) were dischargeable, and federal student loans were dischargeable so long as they were in repayment status for at least 5 years. If only they would bring back the good old days!
Great summation—Thanks–I filed 2 adversaries to discharge student loan debt. Sallie Mae stipulated to discharge my debtor who had MS if she could show low income(I beleive less then 10,000 for the next 3 years). Your right-I should have just had her apply for there hardship discharge but the job got done.. Wells Fargo held private loan debt on my borrower who clearly had no excess oncome. They reduced the total from 67,000 to 50,000 payable over 15 years with no interest–Not sure why they did it… Maybe they lost the signature page or where afraid to lose setting a prescident> Legal fees? not sure..