Student Loans: The Inexpugnable Debt
By: Devan Byrd
The Great Recession of the early 2000s left many Americans drowning in debt, more than $1 trillion of which is student loan debt. At the height of the recession, the average loan debt for those that completed an undergraduate degree was $14,100 up from $6,400 in 1995. Additionally, graduates owing a significant student loan debt also increased to 29% from 9% in 1995. During this time, the employment rate among most traditional borrowers leaving school was unchanged, while unemployment among students leaving for-profit institutions jumped to 20.6 percent. For those able to find work during this time, the same pattern of inequality applied to their earnings.
Although, the increase in student loan debt overall signals a positive trend of more Americans attending college. Many families are unable to afford higher education and have a difficult time making the informed decisions necessary about which institutions and majors will yield the best return on investment. Additionally, these levels of indebtedness are unsustainable long-term and will ultimately effect future American’s decision to attend college. A decision that will have the greatest consequences for first-generation students and minority students further perpetuating achievement gaps and inequality.
What must be done?
The government must step in now to guide those currently drowning in student loan debt safely to shore, while implementing regulations that keep education financially obtainable and connect the availability of student loans to the predatory recruitment practices of for-profit institutions. First, the government should revisit the almost complete bar on discharging student loan debt to provide immediate relief for those in need. Next, the government should adopt a comprehensive definition of “affordable” and a workable framework for the institutions to apply when setting tuition prices and financial aid packages. Finally, the government should reform and regulation student loan lending to attend for-profit institutions.
Beginning in 1976, federal loans were automatically dischargeable after five years of repayment, but borrowers could get out of them earlier if they proved that repayment would cause an “undue hardship.” This benefit ceases to exist. Since 2005, government-guaranteed student loan obligations and those from private lenders are presumptively nondischargeable, even in bankruptcy, absent a showing that the debtor will never be able to afford the monthly payments.
A majority of the federal courts have adopted the Brunner test to determine “undue hardship” in bankruptcy. The Brunner test places the burden on the debtor to prove by preponderance that: (1) the debtor’s current income and expenses, prevent her from maintain a minimal standard of living for herself and her dependents if forced to repay the 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 loans; and (3) she has made a good faith effort to repay the loans. Some courts have allowed for partial discharge when repayment of part of the debt does not constitute an undue hardship, but repayment of the entire debt would. Nonetheless, courts have strictly construed the undue hardship test to prevent discharge in almost all cases.
Annually, fewer than 1,000 people try to discharge their student loans using bankruptcy, and the White House is weighing possibilities to make it easier for Americans to expunge certain student loans made by private lenders by treating the loans the same as credit card debt and mortgages. In specific circumstances, for example student loans that fund expensive for-profit degrees that produce poor employment outcomes and high rates of default and delinquency, relief to some degree seems warranted. This will not open the floodgates of the bankruptcy court to frivolous cases, but instead will reinforce regulations on ill-advised lending practices and require for-profit institutions to provide a better service. Additionally, taxpayers should not bear the burden of this loss while for-profit institutions continue to benefit. The institutions should be required to pay back a portion of the discharged loans when their programs are at fault.
The Lumania Foundation, which focuses on higher education issues, suggests a “Rule of 10” formula for determining affordability based on family contribution. The formula creates a sliding scale that adjusts to each individual family’s circumstances asking them to save 10% of the family’s discretionary income for 10 years, plus students will be asked to contribute while in school by working 10 hours per week. Unlike most discussions on affordability, the Lumina proposal sets out to establish a maximum amount students can reasonably be expected to pay encouraging colleges and policymakers to use the amount as a guidepost when setting tuition prices and designing aid programs. An alternative under the proposal is for the formula to be used to set a maximum amount of loans a student should be expected to borrow. Although, there is little mention of how much families would contribute from current income while a student is in school, the discussion does suggest that families who do not meet the savings standard could be expected to make up for the difference through current earnings, additional work hours, or loans.
Reform and Regulation:
Although, the student loan obligations of Americans are increasing many institutions continue to make high-risk loans to students on behalf of the federal taxpayer to fund educational programs that often do not result in a degree or do not result in a higher-paying job. Associate degrees or certification from for-profit institutions can cost four times more than if obtained from a comparable public institution. The high cost of attendance result in, on average, 96% of the students enrolled to take out student loans. While over half of the students enrolled between 2008 and 2009 left the school without a degree by 2010. What are these institutions doing with all of their money? A majority of their profits go to paying the CEOs millions, marketing, advertising, and recruiting. Only a small portion goes to actual student instruction. The White House has attempted to establish guidelines for these career colleges by requiring that the institutions better prepare students for gainful employment at the risk of losing access to taxpayer-funded federal student aid. Additionally, the White House has initiated a repayment plan linked to income. All Americans with student loan debt should be automatically enrolled in this repayment plan for immediate relief.
 Lumina Foundation, A Benchmark for Making College Affordable: The Rule of 10, 2 http://www.luminafoundation.org/files/resources/affordability-benchmark-1.pdf (Aug. 2015)
 Id. (Significant debt is a debt over $20,000.).
 Adam Looney and Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers an in the institutions they attended contributed to rising loan defaults, Brookings Papers on Economic Activity, 21 http://www.brookings.edu/~/media/projects/bpea/fall-2015_embargoed/conferencedraft_looneyyannelis_studentloandefaults.pdf (September 2015) (Unemployment of traditional 4-year borrowers increased 0.9% and 0.6% of traditional graduate borrowers.).
 Looney and Yannelis, Supra note 4, at 21 (median for-profit borrower earned about $20,900, conversely the median graduate-only borrower earned about $56,100 and the median borrower from a selective undergraduate institution earned about $43,200).
 Lumina Foundation, Supra note 1, at 2.
 Lumina Foundation, Supra note 1, at 2.
 Josh Mitchell, White House Floats Bankruptcy Process for Some Student Debt, The Wall Street Journal, http://www.wsj.com/articles/white-house-studying-new-bankruptcy-options-for-student-loan-borrowers-1426004272 (Mar. 10, 2015).
 Id. (requiring a showing of undue hardship in all cases no matter how many years of federal loan payments that have been made).
 11 U.S.C.§ 523(a)(8) (2010). See Jordan Weissmann, How the Bush Administration Pointlessly Screwed Over Student Borrowers, Slate, http://www.slate.com/blogs/moneybox/2015/04/16/student_loans_in_bankruptcy_how_the_bush_administration_pointlessly_screwed.html (Apr. 16, 2015).
 See Educ. Credit Mgmt. Corp. v. Jesperson, 571 F. 3d 775 (8th Cir. 2009) (declining to only apply the Brunner test); In re Nash, 446 F. 3d 188 (1st Cir. 2006) (declining to apply only the Brunner test).
 Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395, 396 (2nd Cir. 1987).
 See 11 U.S.C. § 105(a) (2010); In re Patricia M. Miller, 377 F. 3d 616 (6th Cir. 2004).
 Josh Mitchell, White House Floats Bankruptcy Process for Some Student Debt, The Wall Street Journal, available at: http://www.wsj.com/articles/white-house-studying-new-bankruptcy-options-for-student-loan-borrowers-1426004272 (Mar. 10, 2015) (The process is expensive because they must be filed in the federal court system and the attorneys require several thousand dollar retainers.)
 Kaitlin Mulhere, A New Way to Define ‘Affordable’ College, Time Money http://time.com/money/4003374/how-to-define-affordable-college/ (Aug. 19, 2015).
 Id. (Traditionally focus on college tuition cost, available grant aid, and what students are left to pay.).
 Looney and Yannelis, Supra note 4 at 36–37.
 Fact Sheet, For Profit U http://forprofitu.org/fact-sheet/ (Although for-profit institutions educate only a fraction of the American student population these institutions receive, on average, 25% of all the federal financial aid dollars.).
 Id. (One in five students from for-profit institutions default on their loans within three years of entering repayment.).
 U.S. Department of Education, Obama Administration Takes Action to Protect Americans from Predatory, Poor-Performing Career Colleges http://www.ed.gov/news/press-releases/obama-administration-takes-action-protect-americans-predatory-poor-performing-career-colleges (Mar. 14, 2014).
 The White House Press Secretary, Fact Sheet: A Student Aid Bill of Rights: Taking Action to Ensure Strong Consumer Protections for Student Loan Borrowers https://www.whitehouse.gov/the-press-office/2015/03/10/fact-sheet-student-aid-bill-rights-taking-action-ensure-strong-consumer- (Mar. 10, 2015)(“Pay-As-You-Earn Loans” capping federal loan payments at 10% of their income).