In 1978, the federal government began altering the student loan bankruptcy laws. Back then, the Bankruptcy Reform Act was signed into law by President Carter. This was in response to a handful of doctors and lawyers who attempted to fraudulently file for bankruptcy after graduation. Instead of allowing then current laws to apply, every student loan holder now found themselves stripped of bankruptcy protection for a minimum of five years after graduation from their school. This established a precedent that put banks and government agencies ahead of students and their families which continues today.
Reform to the current student loan bankruptcy laws has to be addressed due to the size and scope of the debt amounts current student loan holders have. As you may know, according to the Consumer Financial Protection Bureau, student loan debt has grown to over $1.2 trillion. This means that student loan debt is the largest amount of unsecured debt in the U.S., exceeding even credit card debt by almost 30 percent. This also means that nearly half of all American households have some form of student debt looming over their financial future. Per a report released this summer from the Center for American Progress, that is 45 percent of families across the country.
Rising Student Loan Debt & Loss of Consumer Protection
While there is no data collected for 2013 yet, the average debt amount for these families has almost doubled in the last decade. In 2003, the average balance for a 25 year old recent graduate was about $10,649. Not great, but that student and his co-signer (hello Mom and Dad) could see the light at the end of the tunnel. Last year, that average debt amount was $20,326. If you want to run the exact number, that is an increase of 91 percent. That light at the end of the tunnel just went out for a lot of families struggling to keep a roof over their heads and food on the table. In the meantime, the U.S Government is posting record profits off student loan borrowers.
It would be very easy to start reforming the bankruptcy laws and take that burden off of these families, but instead of thinking in the interest of students, lobbyists won and borrowers lost more rights . Back in 2005, a number of amendments to the bankruptcy code were passed that stripped some very basic consumer protections from student loan holders:
- Right to Refinance
- Statue of Limitation on Debt Collections
- Fair Debt Collection Practices
- Truth In Lending
By removing these rights, debt collection agencies can go after honest citizens any use any scare tactics they deem fit to try and collect on the loan. Many of the same lenders own the collection agencies as well and can profit more off the student once the loan is in default.
Despite the loss of these basic protections, many people still have no choice but to try and go through bankruptcy court. As we have pointed out previously at Student Debt Relief, it took Michael Hedlund, a law school graduate, ten years to get just a part of his $85,000 in student loans discharged through the current bankruptcy court system. He was fortunate enough to have a law firm take his case for no fees or pro bono. Most graduates in the system now simply give up due to the cost and just try to do their best to pay the student loan debt despite their situation, or seek student loan forgiveness when available.
Recommended Changes To Student Loan Standards
- Access to income-based repayment for all borrowers
- Deferment provisions for all loans
- Reasonable interest rates and fees
Any loans that do not meet these standards would be considered a higher risk loan and could be discharged through standard bankruptcy proceedings.
Daniel Austin, a bankruptcy law professor at Northwestern University, has called recent graduates “the indentured generation”. Due to the economic recession and the very slow recovery, Professor Austin correctly points out that these highly educated young people, who are now working part-time at Starbucks and the local grocery store, are no longer participants in the economy.
The unemployment rate for them (20 – 24 year olds) is 12.6 percent compared to the national rate of 7.4 percent. In normal economic times, their average is lower than the national rate and helps to drive the recovery. This generation that should be buying cars and starting businesses just does not have the same opportunity as ten years ago. If these people that we depend on for the future of our economy are not given the same protections they have for other unsecured debt, then our future is unsecured as well.