By: Donald L Swanson
We have a student loans problem in these United States.
A huge part of the problem is that we are, (i) focused on addressing symptoms of the problem in small ways, (ii) ignoring the underlying problem, and (iii) enabling higher education costs to spiral out of control.
A recent study provides these statistics on student loans in bankruptcy:
- In 2020, 250,000 student loan debtors file bankruptcy;
- Of those, about 300 obtain a discharge of their student loan debt—that’s 0.1%;
- The other 220,000 (the 99.9%) exit bankruptcy with student loans in tow—even those who have conducted themselves honestly but are in unfortunate, even desperate, circumstances; and
- Put another way, for every 1,000 student loan debtors in bankruptcy, only one will obtain a bankruptcy discharge of student loan obligations.
The study finds such statistics to be “unprecedented” in these United States—nowhere else have so many people sought legal relief which so few have obtained.[Fn. 1]
Such statistics, however, are merely a symptom of the underlying problem.
The real/underlying problem is this: student loans in these United States have become a system of excessive corporate welfare for colleges and universities, that’s paid for by students.
Colleges and universities throughout these United States are totally dependent on this corporate welfare for their existence—even those with endowments worth billions of dollars.
And this corporate welfare comes with little-to-no accountability for either the government or the institutions. Loans are freely given to students for paying tuition, room, board, fees, etc. It doesn’t matter whether the students will ever be able to repay those loans—the loans are given freely and easily anyway. In the world of ordinary lenders, that’s considered improvident lending.
–No Responsibility, Except for Students
And when a student can’t pay . . . it is the student whose future earnings are bound up. It’s not the government’s responsibility. It’s not the college’s responsibility. It’s not the university’s responsibility. No. The responsibility falls exclusively on students.
–Never Goes Away
And the burden on the student never goes away. It follows the student forever . . . literally—or at least until the student’s death ends the ordeal. That’s true even when a student utilizes the government’s “generous,” income-based repayment structure. Never mind that such repayments may not even keep pace with accruing interest. The student will be saddled with that income-based repayment structure, as a drag on the standard of living—even into retirement days and beyond.
–Can’t be Discharged
And that loan repayment burden is not dischargeable in bankruptcy (as illustrated by the .1% v. 99.9% statistic noted above).
The no-discharge status for student loans is akin to the no-discharge status for withholding tax liabilities.
But the rationale for not discharging withholding tax liabilities reveals how no-discharge of student loan is perverse. Consider this.
The rationale for not discharging withholding taxes is a combination of these considerations:
- the U.S. Government is an involuntary creditor for withholding taxes—it doesn’t make a specific loan;
- withholding tax responsibilities are the easiest thing for a financially-strapped debtor to ignore in difficult financial circumstances because the U.S. Government won’t even know about the non-payment (let alone provide accountability) for a long time; and
- so, withholding tax liabilities are declared non-dischargeable in bankruptcy to protect the U.S. Government as an involuntary creditor in circumstances where it can’t protect itself.
For student loans:
- the U.S. Government is a voluntary creditor, engaging (with full knowledge and aforethought) in improvident lending practices;
- the U.S. Government is capable of being immediately aware of any nonpayment on any student loan to protect itself; and
- so, there is no similarity, whatsoever, between student loans and withholding tax liabilities for non-discharge purposes.
What’s really happening is this:
- the U.S. Government is intent on continuing its corporate welfare to colleges and universities and requiring students to fund that welfare system; and
- so, the U.S. Government makes a bankruptcy discharge of student loans virtually impossible, as protection from the hazards of its own improvident lending practices.
The political class on all sides seems unwilling to even mention, let alone confront, the student loan reality of corporate welfare for colleges and universities at the expense of (and at great damage to) our students. The result is that easy funding of student loans allows colleges and universities to charge ever-higher prices . . . which are then paid by new student loans.
So, the continued funding of higher and higher costs both creates and enables the continuing and ever-escalating problem.
Without acknowledging the underlying problem, the future of our students and their student loan problem is grim.
Footnote 1. Jason Juliano, “The Student Loan Bankruptcy Gap,” Vol. 70, No. 3 Duke Law Journal 497, 498 (December 2020).
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Roy S. Kobert
Florida Supreme Court Certified Mediator
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Thanks, Roy, for your thoughts!
Interesting, for sure! !