Many of today’s high school students are led to believe that, should they wish to be competitive in the job market, a bachelor’s degree, and often a post-graduate degree to boot, is necessary. Flocking to universities across the nation, America’s youth are betting against their uncertain futures and burying themselves under mountains of debt. Too often, these students find themselves overwhelmed after they have graduated and the bill collectors come knocking.
In 2010, students borrowed approximately $100 billion to fund their educations. In 2010, graduates who had relied upon student loans to fund their educations emerged from their respective universities with an average of $24,000 in student loan debt. By September of 2010, according to the Department of Education, over 320,000 of the 3.6 million individuals with student loans who had entered their repayment period from October 1, 2008, to September 30, 2009, had fallen behind in their payments by nearly a full year. In 2011, the total value of unpaid student loan debt exceeded $1 trillion.
The Purpose and Effect of Bankruptcy
According to the United States Supreme Court, bankruptcy “gives to the honest but unfortunate debtor … a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”
Debt accrued from home mortgages, medical expenses, credit cards, and even gambling, is dischargeable through bankruptcy. Until 1976, student loan debt was dischargeable, as well. However, changes to the bankruptcy code have decreed that student loan debt, like debt due to unpaid taxes and spousal or child support, is non-dischargeable.
Unlike many types of dischargeable debt, such as credit card debt, student loan debt is generally undertaken with the best intentions. Student loan debt is not accumulated by retail-therapy or the imprudent purchase of homes, automobiles, or other tangible goods. Student loans are taken with dreams of personal fulfillment, notions of being able to better contribute to society, and aspirations to earn a comparatively high salary with which to repay the debt. Yet, all too often, the repayment of these loans is what forces individuals to abandon their passions and settle for the first available job in order to begin repaying the debt.
The Effect of Being Unable to Discharge Student Loans
By denying individuals with good-faith debt, such as student loans, the opportunity for a new beginning, Congress stifles the incentive for individuals to further their educations and implicitly gives approval to those who choose to spend more than they earn on frivolous purchases.
Some argue that it is the prevention of discharge of student loan debt through bankruptcy that compels lenders to provide ready access to the vast sums so many students require. Knowing that the debt owed to them is inescapable, it is said that lenders are less reluctant when faced with the negligible credit histories of prospective college students. However, such easy access to student loans from both federal and private sources has come with dire consequences.
By increasing the amount of funding available and lessening the restrictions to access these funds, we have provided incentives for institutions of higher education to increase the cost of attendance. A study by Bloomberg found that, since 1978 – two years after student loan debt became non-dischargeable – the college price tag has increased by 1,120%.
Solution: Less Federal Funding
Approximately 85% of student loans are federally funded. By limiting the amount of federal funding available through student loans, prospective students will be pushed to make more prudent decisions regarding their financial futures. Rather than choose to place themselves under astronomical debt in order to foot a tuition bill for a degree they may never use, some students may instead opt for the more fiscally sound option of attending community college for two years. Should they then decide that further education is in their best interests, these students have the ability to transfer to a traditional four-year university to complete their studies.
Additionally, reducing the amount of federally funded student loans available to students will lead universities who desire to maintain attendance rates to lower their tuition and fees. Over 7 million students who would otherwise be unable to afford their dream-schools will be taking out federally sponsored student loans to cover their tuition this coming year. Cutting back the available funding is not a penalization levied upon those students, but rather a cap placed on the amount our society says it is willing to pay for higher education. Our current predatory student loan system feeds off well-intentioned students and serves the interests of both the providers of loans and for-profit universities rather than the students reliant upon them.
Why Student Loan Debt Should be Dischargeable
Preventing the discharge of student loan debt has not solved the problem of making college a more attainable goal, but has instead lined the pockets of for-profit universities and destroyed the lives of countless college graduates who struggle to repay the debt.
Enabling the discharge of student loans through bankruptcy will compel lenders to more carefully scrutinize prospective borrowers. Lenders, forced to evaluate prospective students’ likelihood of repayment, will become more restrictive with their disbursements. The burden here is placed not just upon students, but also upon universities who must demonstrate that they are providing a useful, quality education.
Today, the only means by which student loan debt can be discharged through bankruptcy is by showing that repaying such debt will cause an undue hardship. There is no clearly defined means by which an individual can demonstrate that an undue hardship will be caused, though many federal bankruptcy judges have adopted the “Brunner Test” in order to make the determination.
The “Brunner Test” is a three-pronged evaluation which requires that the debtor show that: (1) should they be required to make payments on their student loans, a minimal standard of living could not be maintained; (2) that future prospects of an increased ability to repay the debt are sufficiently bleak to warrant the discharge; and (3) the debtor has made a good-faith effort to make payments thus far. The second prong requires judges to predict the future of the debtor, an inherently difficult and subjective task. Demonstrating that an undue hardship exists is exceptionally trying, providing relief to a mere 50 percent of the few who make the attempt.
Allowing for the discharge of student loans through bankruptcy will not, as some posit, allow graduates to take advantage of a system in which they could theoretically rack up sky-high debt in pursuit of higher education and discharge that debt as soon as they’ve obtained their degree(s). Instead, the federal government and for-profit universities will be given the incentive to provide a quality education at a more affordable rate, reducing the amount of borrowed money necessary.
Some fear that the competitive edge of the United States will be lost if individuals lose access to higher education due to less federally funded student loan money and the limited private disbursements in response to the enabling of student loan debt discharge through bankruptcy. However, it is precisely because graduates are bogged down by debt that our competitiveness is placed in jeopardy. The United States is a nation of ideas and innovation. By forcing graduates to settle for the first available paycheck, rather than use their intellects to pursue their wildest ambitions, we risk our nation’s greatest asset. Proactively seeking to prevent individuals from accumulating debilitating debt is the solution, not the problem.
Professor of education and public policy at the University of Michigan Susan Dynarski stated that “[w]hen you think about what’s good debt and what’s bad debt, student loans fall into the realm of good debt, like mortgages. It’s an investment that pays off over the whole life cycle.” While student loan debt may once have been an investment that paid off over the course one’s entire life cycle, that is no longer the case. For many of today’s graduates, such loans are an inescapable debt for which they are paying throughout their life cycles.