Debt Forever

BRANDON SIMON—Our parents instructed us to go to school and get a job. They said it was a wise investment that would pay off at the end of the day. They told us we need a college degree to get a job. An even heavier proposition is what our parents failed to tell us: our student loans can cripple us for our entire lives. Indeed, most student debt can never be written off and will follow you for your entire life. A significant portion of students with debt are unable to keep up with payments; in 2016, the default rate for students just three years out of school was 11.3%.

At that point of default, a logical option would would seem to be to file for bankruptcy: many, if not most, recent graduates with student loans (or really borrowers) who cannot make payments on their student loans likely do not have many other assets or liabilities to get in the way of a bankruptcy proceeding. However, the bankruptcy code sets a high bar for discharging student loans, requiring students to make a showing of undue hardship.  Many circuits have adopted the Brunner test, which finds undue hardship upon the satisfaction of three elements: (1) if the debtor cannot maintain a minimal standard of living if forced to pay off student loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans, and (3) good faith efforts have been made to repay the loans. The second prong, being the toughest to satisfy, can be shown, for instance, by becoming blind subsequent to defaulting on one’s student loans.

The federal government, however, decides what other avenues exist to forgiving student loans. The federal government not only makes many student loans (at rates of interest far-and-above those typically attached to home mortgage loans) but also decides when the loans may be forgiven. If this sounds paradoxical, that’s because it is: the same entity doling out the loan decides when and how that loan can be forgiven. No other financial institution could run such a monopoly on any one sector of lending.

Nonetheless, the past and current administrations have varied in both degree and kind in regard to releasing, or refinancing, student debt obligations. Perhaps the most illustrative of these dichotomies lies wherein President Obama planned to forgive debtors defrauded by for-profit colleges. However, this plan never really materialized: the Obama Administration only approved 15,000 claims in the first six months of the program, while approving 16,000 applications in the last month of the Obama Administration. The surge in approvals came in response to the next President’s stance on student loans. New Secretary of Education Betsy DeVos suspended approval procedures for forgiving student loans from for-profit colleges. The Trump Administration has planned to make it harder for impacted individuals to be relieved of their debts by changing the standard from “intent to deceive” or “knowingly provided false information” to evidence that is “clear and convincing.” DeVos further limited the scope of the forgiveness by limiting the statute of limitations to three years from the time the debtor “discovered, or reasonably should have discovered, the misrepresentation.” While DeVos has set up a process for forgiving student loans for those who attended for-profit institutions, the bar has been set much higher than under the previous administration.

The Obama Administration allowed for recovery through a more liberal “gainful employment rule,” which would withhold funding to for-profit institutions that do not meet minimum debt-to-income rates for graduates, which incentivizes getting graduates quality jobs. Thus far, DeVos has withdrawn from such rules and, while she is in the process of drafting a new rule, the void allows for schools that should be disciplined to avoid adverse actions.

Alternatively, one can be absolved of student loans by paying a percentage of their income for ten years while working at a qualified 501(c)(3) organization. However, the future of the Public Service Loan Forgiveness program is up in the air. The PROSPER Act, currently under consideration by Congress, would eliminate the ability to write off one’s student loans by working for a qualified non-profit organization. Such a move could have the effect of discouraging graduate level education.

Getting out from under the rock that is your student loans may now, for the reasons described above, be harder than ever. To be clear, this is not to say that one should not be paying back their student loans. In fact, each time a student loan is not paid back, those funds become a liability for the American taxpayer and reduces the tax base’s ability to fund other projects. Perhaps what we really need is increased financial literacy among those undertaking such hefty financial obligations. Further, students may need to tell their parents that despite the advantages of higher education, taking on student loans may not be the way to go.

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