The recent push for student loan forgiveness has been met with increasing opposition. The rationales for not providing a generally applicable path for student loan forgiveness or cancellation have included arguments based upon imagined unfairness to those previously able to pay off their loans, which seems to be both short-sighted, as well as a “red herring” argument. It does not address the question of whether those who are not able to pay should be trapped for life under such debt load. A better argument against general loan forgiveness is, of course, the considerable burden that would be placed upon the federal treasury (taxpayers), which, pursuant to the benevolent policy of helping worthy, but needy, students pursue educational opportunities, guaranteed re-payment as an inducement to lenders to lend money without the usual safeguards or qualifying criteria. The problem with that argument is that the taxpayers are already obligated to repay these ever-increasing loans on into an indeterminate future.
In my practice, I am regularly confronted with those having little in the way of resources yet saddled with massive student loans. The individual circumstances and causes are myriad and variable; yet all possess the near identical characteristic that they came out of college with course work or degrees that did not elevate their earning prospects or upward mobility. Then, they were required to make immediate payment on their student loan debt, but at the time when wage or salary was at the new-hire range, or they were yet unemployed. This often morphed into a choice between a significant monthly payment for the student loan or affording necessary housing, food, and transportation costs. Some did begin repayments immediately but were later confronted with budget-stressing life events, such as divorce, job-loss, economic downturns, or even the happy arrival of children. The ease of delay mechanisms for student loan repayment made the choice of delaying repayment very attractive, if not necessary.
At all times, whether during repayment or deferral of repayment, interest on the original student loan continues to accrue. It is annually capitalized into the original loan balance, with the obvious result that the student loan balance grows. In as short a time as 5 to 8 years, without significant repayment efforts, the original balance may completely double. To lenders, having a federal guarantee for a bad loan that increases in value over time, is the gift that keeps on giving.
At the present time, there are millions of student loan borrowers who have little prospect of full loan repayment, who now pay little or nothing on their loans. They will likely continue in this state as they age, grow old, and die. At the time of death or disability of the student loan borrower, the lender will be entitled to payment of the entire sum, accumulated over decades, consisting of the original principle, decades of interest compounded upon interest, and all adding to an amount that may be 10 times what was originally borrowed. This is the true ticking time-bomb. Far better to effectively confront the matter now rather than allow that debt-bomb reality to fester.
The several income-based repayment programs now in existence may ultimately prove illusory. The executive orders creating debt cancellations at a future time were not then opposed by lenders for all the previously mentioned advantages of letting the debts grow. Also, even small repayments by borrowers to lenders avoids the costs of default and creates a present cash flow permitting more loans. Obviously, small payments are better than none. Further, the matter of cancellation is put off for a significant time, i.e., 20-25 years. However, borrowers who qualify under such programs have not arrived at the 20 or 25 year thresholds for debt cancellation to kick in. Only then will the vulnerabilities of the program be fully examined and possibly challenged. One question is whether a private lender’s fully vested, substantive right, bestowed upon lenders by contract, can be retroactively vitiated by any law or executive order. Another issue, previously mentioned, is that the delay of repayment for 20-25 years upon interest-bearing loans will become an incredible stress upon the federal treasury at that future time. The political process may well react to cancel the cancellation.
Other Approaches
There are two, more positive approaches to making student loan forgiveness/cancellation a generally applicable tool for the needy. Each, if applied with common sense, would ease the current stress upon borrowers, and avoid the cumulative time-bomb waiting down the line. Further, if adopted, such processes would spread out, even minimize, the impact upon the federal treasury.
The first would be a general allowance for bankruptcy discharge of student loan debts. Properly applied, this approach would do a great deal toward alleviating the burdens upon the truly needy and upon the federal treasury. Obvious to all, the present bankruptcy process for student loan discharge has been deliberately turned into a nearly insurmountable, burdensome process. The Department of Education and lender banks directly engaged high-brow, downtown law firms, paying them the highest attorney hourly rates, to apply the full litigation process in opposition to any attempts at student loan discharge in bankruptcy. This includes significant discovery processes and motion practice upon less sophisticated debtors.
The path to bankruptcy discharge has been deliberately contrived into the most expensive, time-consuming process imaginable. It is truly unworkable as a fair, general solution for ordinary debtors. Replacing this with an assumed discharge in Chapters 7 or 13 would always allow creditor review of the worthiness of discharge, or opposition to discharge, in individual cases.
I still remember the claims of “gaming the system” utilized in the 1990s to drastically circumscribe, and practically eliminate, the possibilities of bankruptcy discharge of student loan debt. We were regaled with reports of just-graduating medical students, earning a small portion during internship/residency of the significant earnings to be realized later on, who filed for, and obtained, a bankruptcy discharge of all their student loan debts during those low pay years. These, although not at all typical, were held up as taking unfair advantage of the bankruptcy process to the detriment of taxpayers. Thus, the bankruptcy portal was radically narrowed, not only for medical students, but for all student loan borrowers.
It is perhaps useful to recall that the sudden attention to student loan bankruptcy discharge was not accidental. There had been a gradual, but profound, ballooning of tuition and residence charges by the universities since the early 70’s, with concomitant increases in the need for larger educational loans. The earlier bankruptcy discharge of a few thousand dollars might have had a small impact on the general well-being of the student loan program. However, with later drastically increased tuition, room & board amounts, routinized bankruptcy discharges of one-hundred thousand dollars or more, could significantly stress the entire program, as well as complicate congressional fiscal planning.
Yet the responsible policing of bankruptcy cases can prevent systematic abuses of the bankruptcy processes. Attorneys, trustees, and judges are all aware of the differences between a single mother of three and a just-graduating physician, attorney, engineer, architect, accountant, or other professional. Further, unlike previously, the Office of the United State Trustee has been brought into the bankruptcy process, armed with a statutory mandate to guard against bankruptcy abuses. A multi-tiered approach easily allows more scrutiny of professionals seeking discharges, as well as moving the ordinary debtors toward a discharge without complication.
Another method of dealing with student loan debt would be for the federal guarantors of student loans to be supportive of negotiated settlements. It is in the long-term self-interest of the Treasury to do so. Lenders and servicers, at present, will hardly ever meaningfully negotiate the resolution of a student loan. Under the current regime, any lender of a federally guaranteed student loan will lose that guarantee if they settle with the borrower for a lesser sum. Whatever they settle for will be all they will get. Also, there exists the disincentive that the ongoing accumulation of interest creates the vision of a larger, future payday for the lender. These considerations, unlike other kinds of indebtedness, render settlement most unlikely for anything less than nearly the full loan amount.
However, debtors who are normally unable to pay, may come into a lesser lump sum; or over time, they may develop credit worthiness to borrow a lesser sum. If the guarantor agency could support the settlement by honoring the guarantee as to the remaining unpaid balance, the accumulation of interest would cease, and the amount of guaranteed money ultimately paid would be far less than letting the debt run. The file would be closed, the guarantee would be capped, and all at a significant discount!
Finally, rather than either of the above approaches, repayment of student loans could be positively incentivized, such that significant repayments would come into the student loan coffers and the entire matter of lingering, interest-bearing guarantees would be curtailed. One significant encouragement would be to make student loan repayments directly deductible from income for tax purposes. Such repayments would impact the taxation for only a few years, while the debt for many would actually get repaid well before any 10-15 year repayment process.
Such an approach should also be without regard to income level. After all, those with more income likely owe larger student loan balances; and, as well, have a better ability to repay. Incentivize the repayment and the student loan reservoir gets refilled, while the future danger of ever-increasing guarantees is eliminated.
One further point: there are those who should be made to share the burden of debt cancellation or forgiveness. Certain universities may also have “gamed the system.” Where proven, they surely bear some proportionate responsibility for the increases in the numbers of those who owe but have no serious means of repayment.
Consider the following: In the usual situation, admission to a college or university is limited to those prepared to engage the more rigorous educational challenges presented. Thus, ordinary admission requires graduation in the upper half of one’s high school class (a higher level for some universities), and certain minimum scores on the standardized college admission tests -ACT or SAT. While individual special circumstances may also garner a special circumstance admission, these gatekeeper factors reasonably control admissions. In this way, aptitudes and present level academic abilities are evaluated, with the goal of admitting those presently able to have success in specialized training programs. Thus, one must be able to perform calculus level math (at a minimum) for admission into the colleges of engineering or business. Demonstrated present skill levels are prerequisites for admission into most university colleges or programs, at the time of application.
A university may easily increase its income by admitting large numbers of students who do not possess ordinary admissions criteria, but who do qualify for financial aid and student loans. Thus, a university may set up a process whereby those in the lower half of their high school class, with poorer ACT or SAT scores, are admitted to the university in larger numbers, but not into the main level colleges. While such students may be formally admitted, they may be shunted into remedial course work or programs that would include lesser level courses for math, English, and the sciences. These students are given a chance, and if they do well, then admission to one of the colleges may occur. But in many cases, such students cannot progress. All the while, the university receives significant sums, their budgets may be doubled, and they are incentivized to increase tuition and housing costs.
Where it can be shown that a university has so acted, then they are directly responsible for specific loan burdens upon those who were not uplifted by their “opportunity.” As beneficiaries of such student loans and incentivizers, universities should also be forced to help repay the loan where the benefits have proven illusory to the student. It is only fair that their “gaming of the system” requires some share in the alleviation of guaranteed repayment.
In conclusion, there are no easy or painless ways out. Taxpayers are already on the hook for repayment. The only questions are when and how much.
