Tuesday, December 29, 2009

Productive Whining: What's up with Student Loans and Forgiveness These Days?

Nada.... jack shit nothing.  I did a few searches on Google and found out that the issue is dead.  That's funny. According to my readers, defaulting on student loans is a very real issue, right now.  And it's an issue that weighs heavy on many lawyers' shoulders. 

I have a good friend that buckled down from the time he graduated (2004) until last year, and paid off his private loans. He's not done yet, of course.  But he is close to it.  In order for him to do this, he was frugal. He rarely/if ever went out to eat.  He brought a PB&J sandwich to work daily.  He did not engage in frivolous spending. I think his social life was somewhat limited by how much he was willing to spend, which was nothing. He didn't have a girlfriend during this stressful time.  I know he went on dates, but I'm sure he was somewhat constrained on what he could do with any girl.  Having fun costs money, right?  He lived in a studio apartment with hand-me-down furniture.  Ran instead of joining a gym.  He collected cans from co-workers to recycle for cash.  Wait... the kicker.  This was all while he was earning $100K.  That's how you pay back your student loans, folks.  I'm very proud of him.  I'm not sure that many people could make the same sacrifices.  Afterall, he basically handed one biweekly paycheck a month over to the Lender. 

So, when I spoke to him about my anger at the Bankruptcy Code and how hard it is to discharge Student Loan Debt and the potential for Loan Forgiveness given the current financial situation.  My friend was very against the idea.  He said that he had paid down his debt--why should others get off the hook?
Well, I don't even have an extremely burdensome loan. Maybe $60K at this point.  It's doable.  But even if loan forgiveness or a change in the bankruptcy code was implemented the day after my loans were paid in full, I would welcome the change.  This isn't like the brand new gym my elementary school built the year after I left.   I think that changes to the system need to be made to curb the skyrocketing tuitions at law school.  I'll go into how later....

So, I did find this article that was published in May of this year.  I'm bringing it up on the hopes of bringing the issue back to the forefront of our minds.  It's a good read and there are lots of valuable nuggets of info that pertain to most of my readers. 

It boils down to this:

"Bankruptcy law allows for discharges of credit card debt, car loans and even gambling debt, but not student loans."

Yes. Gamblers are given more breaks that students. And the standards for attempting to discharge a student loan are higher:

"A student loan debtor must try to claim an "undue hardship" to seek bankruptcy protection — a claim that is successful at best about 50% of the time. Unlike a traditional bankruptcy filing, a hardship filing requires debtors to file a lawsuit against creditors. That pits the student against corporate lawyers and defense teams, and often requires an expert witness, which can cost the graduate thousands of dollars to arrange."

No easy task I'm sure.
The change was made in 1998, but the noose tightened in 2005:

"In 1998, Congress ruled that federal student loans were not allowed to be discharged except under the undue hardship provision. In 2005, private loans, which can carry terms up to 25 years, came under the same regulations."

And in the same period of time, student loans have more than doubled. I'm sure this is causation, not just correlation. If there is no risk in giving a loan to a student, student loans are sure to be given out like free candy on Halloween. But this bazooka gum is laced with cyanide. And student loan default rates are the highest they have been since 1998: the year the code changed.

The article goes into a few student loan sob stories, with a couple of them being law school graduates. I wasn't surprised.

Well, President Obama has recognized the problem.  And in Obama fashion, has punted the issue.  However, Sen. Dick Durbin and Rep. Danny Davis, both democrats from Illinois, (Da Bears!) have taken this issue to heart.  Durbin wants to bring the code back to its pre-2005 form.  Davis wants to re-introduce a bill addressing the crisis, a bill that was voted down last year.

I wish I can tell you what happened to this bill. Unfortunately, the crappy computer I use on my doc review project shuts down if I have too many windows open at once.  Maybe my unemployed readers can do a little reseach and find out for us all.

Whatever the outcome, I am sure it wasn't helpful because the only viable solution I've heard for defaulting on your student loan is moving out of the country.

The most telling statement in the whole article was this; "If private student debt can be discharged in bankruptcy, that creates risk, and the result will increase the cost of tuition," says Scott Talbott, chief lobbyist for the Financial Services Roundtable.

Sure.. that's what he would say.  He, from his vantage point of self-interest and greed, sees that many schools would be forced to raise tuition to account for all of the students that would default on payments.  Simplistically, maybe.. but realistically no.  Because there is a big middle man.  What would happen is this.... once risk is infused back into the equation, KHELC and ACCESS and Sallie Mae [hereinafter "Lenders"] would be forced to realistically evaluate whether or not a borrower is a good investment or a nominal risk.  I can only judge my own field, so let's use a law student as an example.  If Suzie Q. Lawyer wants to go to law school at TTT School of Law and got a 147 on her LSAT, Lenders may think twice about handing her $120K to attend law school.  She would be a high risk for a default.  So, law school tuition may increase in the short term to account for all of the students that couldn't obtain financing... but ultimately schools would have to streamline and lower the tuition to assist 0Ls or new students in college (or whatever) in obtaining loans from the Lenders, i.e. "Come on, Lenders! Surely I will be able to pay back $50K if I go to TT school of law where I can come out earning $45K"--Suzie Q. Lawyer. So, ultimately, and contrary to what you may have believed about me, I believe that libertarian and capitalist principles will save us. It's not right that lenders can make money without bearing risk. Risk can be brought back into the equation with a revision of the Bankruptcy code.

Wow... I'm winded.


  1. Student loans are a bailout to incompetent institutions can inadequately prepare us for the real world. Let the schools fail! No student loan money!

  2. Isn't there some sort of income-based repayment system in effect now? I'm not sure how that works, but if it were tweaked it seems like it might be a fair solution to those who have already agreed to take on the debt that they are having trouble paying.

    Of course, I do agree that something has to change in the future (like making it more difficult to obtain the loans, especially for students who plan on attending a school with dismal employment prospects).

    But for people who signed on the dotted line and voluntarily took on too much debt...I really don't think it should be forgiven unless you do the 10 year public service thing. As I've said before, however, if you really think that your particular school defrauded you, then you should get your facts together and go after them. If you can't, then you need to chalk it up to getting screwed and being unable to get justice.

    Not everybody gets justice in this life...


  3. I think Doug is going to be a law school dean...

  4. I'm glad I got you to put *your* thinking cap on with my suggestion. This kind of post is much much more palatable than the last one. Bravo. And with this my job is done...

  5. I'm always up for suggestions. Thanks! Please don't stop. I think that there has been changes to the payment plan if you're in nonprofit work. But that isn't allowing people to discharge in bankruptcy.

  6. I remember the days before private loans were non-dischargeable. Back then, private lenders started REFUSING to loan money to students attending bottom ranked schools.

    Because they knew that a lot of the students from these schools would graduate, not find jobs, and file bankruptcy.

    Which is exactly the way the market should work. Lenders (and indeed law schools) should be forced to bear some of the risk that their graduates will end up unemployed or underemployed.

  7. @nycsolo: lenders, I agree... law schools, not so much (unless they committed some kind of fraud).

    Doug, future law school dean

  8. Doug,

    The future law school dean comment was an insult, not a compliment. You really are clueless...

  9. I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.



  10. This situation has been fueled by the same foolish optimism of debtors and greed of lenders that created the the sub-prime housing market bubble. The persons taking out exorbitant student loans and mortgages are to blame, but so are the banks. Banks should bear a part of the risk of student loans through a change in the bankruptcy laws. Banks should not allow students who will very likely have with no job prospects to borrow more than a few thousand dollars if anything at all.

    I don't think that capitalism can save everyone in this case, unless bankruptcy laws were to change and force banks to evaluate the law market and employment prospects of each potential debtor critically. There will always be a fresh crop of would-be law students willing to take on the debt, banks willing to give them loans and law schools willing to take the money. I suppose people could stop applying to law school, but short of everyone getting knocked upside the head to get some sense knocked into them, I don't think that's going to happen.

  11. A 50% success rate arguing undue hardship is beyond laughable. Try about 1%. I read every single published undue hardship case on Westlaw a couple years ago and suffice it to say, there were some crazy situations in which the debtor was held not to have met the undue hardship burden.

    Doug, as far as IBR goes, private loans, which comprise a large part of most law students' financing, are not subject to it.

    Angel, alanna/Alena is a spambot.

  12. you borrow some money, you pay it back. which part of it do you not understand?

  13. I thought I had some protection against bots. Damn it!
    Jerry: what is an undue hardship according to your reading? Cancer?

  14. Have you been to http://www.forgivestudentloandebt.com?

  15. Didn't somebody recommend bringing back debtor's prison to provide an alternative to paying back our loans. I'm all for that. It's not like I'm doing much anyway thanks to my JD.

  16. Angel - that's essentially what I found - basically any terminal condition, but nothing less. Here's something I just found but haven't fully read yet:


    And Rob, good to have you, keep up the good fight!

  17. The situation with student loans is so similar to the housing crisis. Instead of overpriced houses, we have overpriced degrees, and we debtors essentially have underwater mortgages on our lives. The default rate would be catastrophic if not for the existence of income-based payment plans such as IBR and ICR, which in and of themselves are a huge drag because if you ever do obtain a decent income you'll be raped by the remaining balance of your federal loans.

    Thus, going to law school is to be cursed into eternal poverty.

  18. Jerry:
    Do you mind if i read that article and blog it at some point? Maybe a primer on how to fight for discharge in bankruptcy court and win? Lemme know.

  19. IBR and Public Service Loan Forgiveness are the greatest thing ever if you only have government loans and are lucky enough to be a government attorney.

    Your payments are always low relative to your salary, and the increasing balance the first few years is basically meaningless because everything is forgiven after 10 years, not just the original amount borrowed.

    If you borrowed from private lenders to go to law school, it's true you're out of luck. Then again, you should have known it was no different than putting your tuition on a VISA card.

  20. We need to contact Sen. Durbin and Rep. Davis to urge them to fight for us! We need reform: the current system is extraordinarily unsustainable and more than that, it is patently unfair. If someone loves shoes and ends up with $30K in credit card debt, why is he or she given more protection than someone who wants to better themselves, get career opportunities and let's face it, do exactly what we've heard all our lives is the key to a better future: get more education!?
    Also, as to the private loan comment the above-commenter left: if you go to a private law school, chances are it is extremely expensive and chances are the federal loans will only cover so much. And because of that, law students HAVE to take out private loans. Now, it is not very fair to say "we should have known better." There are MANY factors at work that lead to students taking out private loans: 1) necessity- your law school tells you that x amount of federal covers this much and you need y amount of private loans to make up the difference. Often, it's a pretty sizeable amount. 2) They beat you over the head in law school that your lender will "work with you" to find the best repayment plan post-graduation etc. That there will be options and help if can't make your payment (Turns out that is utterly untrue- if you can't pay your private loans, they won't do a damn thing to "work with you" aside from jacking up interest and fees.)
    But as to the "we should have known better" statement. Are we really to treat not-for-profit educational institutions (some that are major, major schools) who receive federal money and are the biggest promoters of ethics and social justice the same as Sammy's Used Cars across town?? Somehow, I'm not surprised that naive 22-year-olds don't know better.

  21. Angel, a post referencing that article would be great and much needed!

  22. So what about federal loans contracted for and spent prior to 1998, or private loans contracted for and spent prior to 2005? Any arguments of ex post facto, bankruptcy as constitutional right?



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