Occupy Wall Street Needs a Clear Objective: How About Bankruptcy Relief for Overburdened Student-Loan Debtors?
by Richard Fossey - December 15, 2011
This commentary recommends that the Occupy Wall Street protests demand bankruptcy relief for student-loan debtors
You can fool all of the people some of the time, Lincoln observed, and some of the people all of the time. [B]ut you cant fool all of the people all of the time. The Occupy Wall Street protestors--huddled in tents and shanties in cities across America--are some of the folks who are not fooled about economic conditions in the United States.
Conservative pundits revile the Occupy Wall Street protestors as communists, anarchists, and criminals; and counter-protestors hold up derisive signs that read, Get a Job! But of course that is the point. Many of the protestors are unemployed or severely underemployed. If these people had good jobs they wouldnt be camping in urban parks or subjecting themselves to police beatings and arrest.
No--the Occupy Wall Street protestors are not wild-eyed radicals. Most are simply angry Americans demanding economic justice. (Lacey, 2011). Unfortunately, the Occupy Wall Street movement cannot achieve its goals for economic justice without defining some clear objectives--which so far it has not done. It is not enough to say Congress should tax the rich or regulate the financial sector better. Occupy Wall Street needs to boil down its broad demand for economic justice to articulate some clear and realistic political goals.
Student Loan Default Rates Are Catastrophic
Let me suggest one plank for OWSs economic justice platform--bankruptcy relief for overburdened student-loan debtors. Although the U.S. Department of Education wont admit it, default rates on student loans are catastrophic--especially for students who borrowed money to attend for-profit colleges and vocational programs. Even by DOEs own anemic standard for measuring default rates, those rates have doubled over the past few years (Blumenstyk, 2011). And DOEs rating system only measures defaults in the first two years of the student-loan repayment period. When the measurement period is expanded to three years--which DOE will soon do--the default rate spikes dramatically--particularly for students who borrowed to attend for-profit institutions.
And even these numbers dont tell the full story. Students who qualify for economic hardship deferments are not making their loan payments, but they are not counted as defaulters. Some for-profit institutions have encouraged their students to apply for economic hardship deferments in order to keep their institutions official student-loan default rates down. Unfortunately, for most of the people who have economic hardship deferments, the interest on their loans continues to accrue (In re Halverson, 2009). If student-loan debtors defer their payments for just two or three years, they will see the outstanding balance on their loans grow significantly--perhaps to an amount so high that they will never be able to pay back their loans. Some experts estimate that the student-loan default rate for students who attended two-year for-profit institutions is 40 percent (Field, 2010); and another analysis concluded that a majority of students who borrowed money to attend for-profit institutions are in default (Lewin, 2010).
And of course a student-loan default subjects the defaulter to a torrent of bad consequences. Their credit is ruined; they become subject to all the wiles and torments of debt collectors; they can have their income-tax refunds garnished; they can even have their Social Security checks dunned (Fossey & Cloud, 2011; Cloud, 2006). In short, as a recent New York Times editorial put it, defaulting student-loan debtors wind up in financial purgatory (Editorial, 2011, p. A34).
President Obamas Plan for Student-Loan Relief Doesnt Go Far Enough
To his credit, President Obama recognizes the need to give overburdened student-loan debtors some relief. Recently, his administration proposed to move the starting date forward for a federal program that will give debtors the option of paying ten percent of their income toward paying off their student loans over a period of 20 years--with the unpaid balance to be forgiven at the end of the 20-year period. Kevin Carey proposed a similar model in a recent issue of Chronicle of Higher Education (Carey, 2011).
President Obamas plan is helpful, but it does not go far enough. First of all, students who borrowed from private lenders instead of the federal student-loan program are not eligible to participate. Second, as currently designed, it will be awkward for students to participate since they must reapply every year (Carey, 2011). But most importantly, the plan contemplates that millions of former post-secondary students will subject themselves to a repayment period that stretches over 20 years--the majority of most peoples working lives.
Bankruptcy Relief is the Best Option for Overburdened Student-Loan Debtors
American political leaders, American universities, and the American people as a whole must face the fact that the federal student-loan program is out of control, with total outstanding indebtedness (including student loans from private lenders) approaching $1 trillion. Incredibly, student loan debt now exceeds the nations credit card debt.
What went wrong? First, a significant number of students took out loans for education programs that did not give them the skills necessary to earn an income that is adequate to pay back their loans and have a decent lifestyle. For example, some student-loan debtors enrolled in for-profit institutions that gave them little value for their money. In fact, this has been a serious problem for years. Now, a new group of student -loan debtors are under pressure--students who borrowed money to obtain excellent educations--an ivy-league law degree for example, but who cant find jobs.
Bankruptcy, as originally envisioned in this country, was intended to give overburdened debtors a fresh start. Until fairly recently, that fresh start was available to any insolvent debtor, whether or not the debtor made good financial decisions prior to going broke.
Congress, however, has barred student-loan debtors from the bankruptcy courts unless they can show they will be subjected to undue hardship if they are not relieved of their loans. The undue hardship standard, as interpreted by the courts, makes it extremely difficult for student-loan debtors to obtain bankruptcy relief. And even debtors who think they qualify for bankruptcy relief under the undue hardship standard must hire an attorney in order to obtain this relief (Pardo &Lacey, 2009).
Student loan debtors should have the same access to bankruptcy that other insolvent debtors have--for example, the person who borrowed money to start a business that was not successful; the person who accumulated a mountain of debt due to a medical bills; or an individual who was financially ruined by divorce or other unfortunate life event.
Bankruptcy Relief for Student-Loan Debtors is Not a Radical Idea
Bankruptcy relief for overburdened student loan debtors is not a radical idea. The National Bankruptcy Review Commission (1997)--hardly a radical entity--recommended this reform almost fifteen years ago. Unfortunately, Congress assumes that allowing student-loan debtors to discharge their debts in bankruptcy will encourage people to abuse this privilege; although there is no evidence to support that conclusion. Prior to Congressional action in 1976, student loan debtors were not barred from discharging their student-loan debts in bankruptcy, and the record shows no pattern of abuse (Pardo & Lacey, 2009).
If Congress is concerned about students filing for bankruptcy immediately after graduating from college, it could ban student-loan debtors from filing for bankruptcy until five years after the loan repayment period begins. In fact, in 1976, Congress passed a law that imposed a five-year waiting period before debtors could discharge their student-loan debts unless they could show an undue hardship (Education Amendments of 1976). Later, however, Congress changed the law so as to impose the undue hardship condition for discharging student loans no matter when a debtor files for bankruptcy.
In any event, it is a crime to use the bankruptcy courts to commit fraud. If a student-loan debtor abuses the bankruptcy process to discharge loans that the debtor has the ability to pay, adequate processes are in place to detect that abuse and prosecute the abuser.
Conclusion: OWS Should Demand Bankruptcy Relief for Student-Loan Debtors
Reasonable access to the bankruptcy courts for overburdened student loan debtors should become Occupy Wall Streets battle cry. Of course this cannot be the only item on an economic justice agenda, but the student-loan crisis is causing hardship for millions of Americans; and bankruptcy is a fair and reasonable option for providing some relief.
Blumenstyk, G. (2011, May 20). Default Rate on Federal Student Loans Jumps to 8.9%, a Nearly Two-Point Rise. Chronicle of Higher Education Online. Available at: http://chronicle.com/article/Default-Rate-on-Federal/127602/
Carey, K. (2011, October 28). The U.S. should adopt income-based loans now. Chronicle of Higher Education, p. A96.
Cloud, R. C. (2006). Offsetting Social Security Benefits to Repay Student Loans: Pay Us Now or Pay Us Later. Education Law Reporter, 208, 11.
Editorial: Help needed for Student Debtors (2011, September 15). New York Times, p. A34.
Field, K. (2010, July 11). Government vastly undercounts defaults, Chronicle of Higher Education Online. Availabe at: http://chronicle.com/article/Many-More-Students-Are/66223/
Fossey, R. & Cloud, R. C. (2011). From the cone of uncertainty to the dirty side of the storm: A proposal to provide student-loan debtors who attended for-profit colleges with reasonable access to bankruptcy court. Education Law Reporter, 272, 1-18.
In re Halverson, 401 B.R. 378 (Bankr. D. Minn. 2009).
Lacey, M. (2011, October 18). Countless grievances, one thread: Were angry. New York Times, p. A1.
Lewin, T. (2010, August 14). Loan Repayment Rates Lag at For-Profit Colleges, Government Data Shows New York Times, p. A13.
National Bankruptcy Review Commission (1997). Bankruptcy: The next twenty years. Washington, DC: Author.
Pardo R. I. & Lacey, M. R. (2009). The Real Student-Loan Scandal: Undue Hardship Litigation American Bankruptcy Law Journal, 83, 171-235.
Samand, J. (2011, October 26). Obamas student-loan plan scores political points but offers limited relief. Chronicle of Higher Education Online. Available at: http://chronicle.com/article/Obamas-Loan-Plan-Scores/129551/
Student loan debt surpasses credit cards (2010, August 9). Wall Street Journal (WSJ Blog). Available at: http://blogs.wsj.com/economics/2010/08/09/student-loan-debt-surpasses-credit-cards/.