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.