Imagine graduating from college with a tassel and $80,000 of student-loan debt. Now imagine what may happen over the next 15 years — periods of unemployment, no raises, a sick child and home repairs. Perhaps you are one of the 50,000 metro Atlanta families each year that make the difficult decision to file personal bankruptcy. How does it feel to discover your student loan debt will survive bankruptcy and never go away? Tax refunds? Seized. Wages, bank accounts, even Social Security benefits? Garnished.
The federal bankruptcy law does not allow debtors to discharge student loans except in rare circumstances. Before 1998, student loans could be discharged if they were more than seven years old.
It’s time to return to a standard that would create a reasonable balance between personal responsibility, economic reality and the law’s stated goal: to offer honest, unfortunate debtors a fresh start. The law’s enhanced protection of student loans arises not from reasoned policy debate, but from the lobbying power of colleges and lenders who feed at the trough of government loan guarantees. It’s time for the market, not congressional largesse, to assign risk to colleges and student loan lenders.
Over the past 30 years, colleges have raised tuition at a rate of close to 8 percent per year, more than inflation. Their consumers are 18-year-old freshmen who are told to “sign here” without any practical disclosures about the monthly financial burden that descends six months after graduation. The University of Georgia, for example, estimates tuition, housing and food cost for a four-year degree will exceed $80,000.
Banks that issue government-backed student loans enjoy the windfall of guaranteed interest accrual of about 7 percent, plus an iron-clad guarantee of payment. The same market distortion that created our housing crisis is alive in the student loan market. This time Sallie Mae is struggling to withstand the tsunami of more than $1 trillion of student-loan debt. Bankruptcy is not and should not be an easy way out. It’s a necessary safety valve to protect financially struggling Americans from indentured servitude to creditors. Those who choose bankruptcy will face court scrutiny of their budgets and a required repayment plan if they show an “ability to pay” based on stingy budget expense allowances derived from what the IRS uses in tax settlements.
The pre-1998 version of the bankruptcy code permitted debtors to treat student loans that had come due more than seven years earlier the same way as general unsecured debt such as credit cards and unsecured personal loans.
In a return to prior law, student-loan creditors would retain the right to challenge the discharge of individual debtors in cases of abuse. It is time to return this limited lifeline to struggling American families.
Jonathan Ginsberg is an Atlanta bankruptcy attorney.
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