There is an easy fix for the student loan debt crisis. This important responsibility should be restored to the bankruptcy courts for deciding whether or not to give relief to individuals who claim they can’t pay. The bankruptcy courts were in charge of the process before there ever was a student loan bubble. In a nutshell, bankruptcy used to discharge student loans. That is, provided the borrower had owed the money for a significant length of time and had proved the inability to pay anything back. Borrowers of today who don’t want to expose themselves to the strictures of the bankruptcy process should continue to owe what they borrowed.
It was ill advised policy to take bankruptcy law out of the student loan relief equation. (A tiny exception remains for the almost impossible to achieve “undue hardship” bankruptcy discharge). The present crisis is the fruit of that ill advised policy change. The elimination of a bankruptcy discharge removed an important safety valve which used to protect the economy from the explosive pressures now referred to as a student loan debt bubble.
We can fix the problem with no need to expand the court system. There will be no need for additional expenditures of public money to administer a student loan fix. The determination of discharging student loan debt can be effortlessly returned to an existing bankruptcy court caseload. Humankind will never devise a bureaucracy that can accomplish the task at hand with as much justice and efficiency as what the bankruptcy courts already do with credit card bills and other debts on a daily basis.
Those who claim the bankruptcy law is soft should know better. Today’s bankruptcy law is tougher on bankruptcy filers than at any other time in the past 100 years. A chapter 7 debtor of today must establish insolvency on a cash flow basis, (in addition to numerous other strictures that govern the discharge of specific debts, the exemption of assets, and the granting of a general discharge of debts).
Cash flow insolvency must now be proven by every consumer bankruptcy filer. This happens under two separate examinations. First, an arbitrary means test using standardized living expenses formulas is used to determine if the debtor theoretically has excess disposable income left over after paying for necessary basic living expenses. Then there is a separate detailed analysis of each person’s actual income and actual living expenses. Individual consumers who have disposable income over and above what the court determines is needed for reasonably necessary living expenses are denied a Chapter 7 bankruptcy discharge.
Allowing student loans to be included in bankruptcy, (after a suitable waiting period) will bring justice, consistency and discipline to student loan borrowers. It will provide circumstantial assurance to the public that relief is granted only to the most deserving individuals.
The bankruptcy court has the proven expertise of determining if and when an individual should be granted debt relief. After a waiting period of 7 years, (as in the previous bankruptcy statute) or some other suitable waiting time, society will enjoy the adequate assurance that individuals can not grab their diplomas and rush off to file bankruptcy on their student loans.
“Let’s tell another one million students that when they graduate, they will be required to pay only 10 percent of their income on student loans, and all of their debt will be forgiven after 20 years –- and forgiven after 10 years if they choose a career in public service, because in the United States of America, no one should go broke because they chose to go to college.“– President Barack Obama,
January 27, 2010
The President is just so terribly wrong. All persons with student loan debt should be treated equally. Public servants should not be treated better than any other American is treated.There is no reason to grant relief to a fireman earning $234,000 per year in Orange County, California and deny the same to a grocery clerk earning 30,000 per year in a private sector job.
The alternative to bankruptcy is an expensive, bureaucratic administration that is already granting permissive, across the board relief based on class status, (such as public service employment). The President’s program provides loan relief for individuals who are fully capable of paying their student debt. But those who can afford to pay will apply for relief anyway, just because they can. It is well documented that public service jobs no longer lag behind salaries paid in the private sector. It is a morally twisted policy to grant student loan debt relief for public sector workers and yet deny the same relief to most workers in the private sector.
The social and financial stigmas of bankruptcy remain strong. Those will continue to serve as a broad deterrent that will keep most individuals from seeking bankruptcy relief. The bankruptcy law already has teeth strong enough to chew through the student loan problem. Dismissal of every “bad faith” bankruptcy case is already the norm.