If you’ve gone to college in the U.S., chances are, you know what it’s like to be saddled with student debt post-graduation. The burden of paying back those loans can wreak havoc on the finances of individuals for years and decades to come.
Now, the growing debt numbers are also posing a threat to the larger economy. Outstanding student loan debt reached an estimated $867 billion in the fourth quarter of 2011, according to a report released by the Federal Reserve Bank in New York in March. That eclipses what Americans owed on both credit cards and auto loans. More recently, a report from the Consumer Financial Protection Bureau (CFPB) put the amount owed on both federal and private student loans at more than a trillion dollars.
Congress has tried to tackle this growing student debt “crisis” by enacting various protections aimed at helping borrowers avoid default, including cutting interest rates and allowing for income-based repayment. But some say more needs to be done. Senator Richard Durbin (D-IL) would like to make it possible for students who take out loans from private lenders, to be able to discharge their debt in bankruptcy. Durbin introduced a bill in May that would eliminate a 2005 provision that prohibits privately issued student loans from being dischargeable. Critics say this would result in higher interest rates, which would impact all student borrowers, and that the real issue is the rising cost of a college education.
Brett Weiss, Chung & Press law firm bankruptcy lawyer and partner, said discharge should be allowed, but only in certain cases. "You clearly don't want to allow someone to go to a 4-year college, get a degree and turn around the day after graduation, and be able to get a bankruptcy discharge," he continued.
According to Weiss, people's career goals change, or their professions change and render learned skills obsolete. Those are the students who need dischargeable loans.
Stanford University professor of law G. Marcus Cole said what sounds like a good idea could eliminate the whole market of student loans.
"Student loans are fundamentally different than any other kind of borrowing that takes place in our society. When you borrow for a mortgage to buy a house, that mortgage is supported by both your income and the value of the house that you're buying," he explained. "Student loans are basically a situation where a student who typically has no assets and no current income goes to a lender and says, 'I'm going to promise to pay you in the future, out of my future higher income, for the loan that you're giving me today."
With dischargeable loans, the risk that lenders would not receive the money they originally lent would increase. Cole added that investors wouldn't see the sense in lending to students anymore.
But how much good is maintaining the market if the debt is too high to be repaid? One KPCC commenter said he was swamped with $300,000, and though a series of bad decisions led to his predicament, Weiss questioned the worth of continuing to punish students like him.
"It is appropriate to allow the discharge ability of that type of student loan debt. It's never going to be paid," Weiss said. "Do we want to have this individual drop out of the economy, not be able to buy a house, not be able to buy a car, work in the cash economy, not pay taxes ... does that benefit us all?"
Cole maintained that the student loan market must remain open, whether that takes increased responsibility from both lenders and students taking out loans.
"We're trying to create a system where people who don't have current resources can build their human capital to be able to participate in a more sophisticated economy, so we want this kind of lending to take place," he said.
From the phones:
Lindsay from Pasadena said she sympathizes with those racked with debt, but asked students to take responsibility of their own financial burden. "I chose a field in anthropology that's not lucrative," she said. "I made it a priority to pay my student loans back from graduate school because it was a debt that I owed in gratitude to the government and private organizations for helping me get that education and opportunity."
Laurie from Burbank took the same stance, and said she's about to graduate from school without any student loan debts. "I'm a little resentful when I hear people want to complain about having such a huge debt, because there are other alternatives, although they take a lot of time and a lot of energy."
She added that she would even purchase the second or third editions of textbooks to save money.
Julie from Culver City said she wants to pay back her withstanding debt of $120,000, but doesn't have the means to.
"I signed on the dotted line. I would like to pay it back. The problem is my lenders have absolutely no motivation to work with me to give me a repayment schedule that's actually realistic." According to Julie, the banks have absolutely no reason to help, because her parents cosigned the contract. She suggested that schools tuition increases aren't fair in the down economy, leaving her helpless with her debt.
"Schools really need to be called upon to answer why tuition has been rising so out of control. My tuition when I left was $10,000 more per year than the first year that i started – for seemingly absolutely no reason," she said. "Lucrative jobs didn't exist when I graduated."
Edith in Downtown L.A. said students should be able to pay what they take out, but offered a creative solution for those in trouble, "in a job, in an area that's under-served, underprivileged, that kind of thing, in exchange for a portion of that student loan to be forgiven."
So, what’s the best way to ease the student-debt burden? Should borrowers who’ve made a good-faith effort to repay their loans be able to pull the bankruptcy rip cord on student debt? Or would escaping repayment through bankruptcy cause other problems that should be avoided? And what, if anything, can be done to make higher ed more affordable to all?
G. Marcus Cole, Professor of Law, Stanford University; Testified at Senate Judiciary Committee (subcommittee) hearing on this topic March 20, 2012
Brett Weiss, Bankruptcy Lawyer & Partner, Chung & Press law firm based in Greenbelt, Maryland; Maryland State Chair, National Association of Consumer Bankruptcy Attorneys