Let the student loan debtors use bankruptcy

A lot of the Occupy protesters are unemployed or underemployed college graduates who can’t pay their student loans.  Well, you may say (if you’re in my generation), they shouldn’t have borrowed the money in the first place if they weren’t in a position to repay it.  But they have little choice.

Double click to enlarge

Young people today believe, with good reason, they have no economic future without higher education.  The cost of higher education has gone up so much that it is not affordable for most middle class and working class families without borrowing.

But unlike with any other form of debt, you can’t go through bankruptcy, sell what you have and pay what you can, and make a fresh start.  If you don’t get a good job right out of college, you may be struggling for the rest of your life.  Even when you go on Social Security, your income can be garnished to pay your outstanding college loan debt.

As the chart shows, this wasn’t always the case.  When the student loan program was established, college debt could be discharged through the bankruptcy process, the same as anything else.

Mike Konczal on his Rortybomb web log asked a good question.   Why not turn the clock back to 1989 or 1997, when student loan debtors could at some point use the bankruptcy process like everybody else?

Consider these facts, as recently reported in USA Today.

  • Last year the amount of college loans taken out crossed the $100 billion mark for the first time.
  • Total college loans outstanding are expected to go above $1 trillion this year.
  • Americans now owe more on student loans than on credit cards, maybe partly because credit card debtors can go through bankruptcy.
  • Students nowadays are borrowing twice as much, adjusted for inflation, as they did 10 years ago.
  • Total outstanding college loan debt has doubled in the past five years.

As Elizabeth Warren once asked:

Why should students who are trying to finance an education be treated more harshly than someone who negligently ran over a child or someone who racked up tens of thousands of dollars gambling?

Click on Student loans headed for $1 trillion this year for the full report in USA Today.

Click on Two Steps Toward Ending Our Current Student Loan Problems for Mike Konczal’s full comment on this subject on his Rortybomb web log.  (Hat tip to him for the chart.)

Click on Student Loan Scandal Fallout for Elizabeth Warren’s full comment on Credit Slips, a group web log about credit, debt and bankruptcy.

Click on Dancing Around the Edges of Student Loan Reform for a rebuttal to Mike Konczal [Added 11/1o/11]

The Democrat and Chronicle reports that President Obama will issue an executive order that will make a student loan relief law enacted in 2010 take effect in 2012 instead of 2014, with the following modifications:

  • Annual repayments would be capped at 10 percent of discretionary income instead of 15 percent.
  • Loans would be forgiven after 20 years instead of 25 years.
  • Debtors who have a mix of direct federal loans and loans under the old Federal Family Education Loan Program can consolidate them, with an interest rate half a percentage point lower.

However, borrowers with loans from 2007 or before will not be covered, nor will those who don’t have at least one loan from 2012 or later, nor will borrowers in default, nor will borrowers with private loans.

In short, a small percentage of borrowers will get some small and long-range relief, but the basic situation will remain unchanged.

Click on Student Aid on the Web and Repayment Information for information on the U.S. Department of Education web site.

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