|Senator Elizabeth Warren|
Friday, June 13, 2014
How To Get Rid of Your Student Loans
The answer is to elect more Democrats to Congress. The Republicans have made it all but impossible to ever get rid of your student loans, particularly not in bankruptcy proceedings. If you file for bankruptcy protection from your creditors, no matter how disastrous your financial situation is, you will emerge from the bankruptcy still owing every penny of student debt you incurred, and that debt will follow you to your grave.
It wasn’t always so. I’m a law professor at The Ohio State University, and I’ll be teaching the course on bankruptcy there this coming fall semester. Prior versions of the federal Bankruptcy Code allowed student loans to be discharged in bankruptcy where it was clear that there was no way the former student was going to be able to pay them off. But in 2005 the Republican-controlled Congress pushed through major changes in the Bankruptcy Code, most of which were designed to screw consumers and reward banks. Deceptively named “The Bankruptcy Abuse Prevention and Consumer Protection Act” (BAPCPA), the statute made it difficult for many debtors to enter the usual bankruptcy proceeding in which the debtor surrenders all his/her nonexempt property and then is forgiven most outstanding debts, thus getting a fresh financial start. Instead if the debtor shows any ability to repay those debts BAPCPA denies entry into that sort of bankruptcy and instead forces the debtor into a Chapter 13 plan, which consists of five years of debt repayment before there is a reduced discharge of some debts.
Whichever version of bankruptcy consumer debtors enter, BAPCPA forbids the discharge of student loan debts unless paying those debts would “impose an undue hardship” on the debtor or his/her dependants [Bankruptcy Code §523(a)(8)]. The courts have construed “undue hardship” very strictly so that mere current inability to pay the debts is not enough to qualify. Instead it must be obvious that the debtor will never be able to repay. For example, in one case, Barrett v. Educational Credit Management Corp., 487 F.3d 353 (2007), the Sixth Circuit Court of Appeals allowed Mr. Barrett to use “undue hardship” to discharge his student loans because he had Hodgkin’s disease, with lymph nodes in his neck, abdomen, lungs, and liver, and was in pain so great he couldn’t hold up a coffee cup. This made him unemployable, and there was no hope of recovery. But it is a rare bankrupt-seeking debtor who is “fortunate” enough to be struck so low as to meet this standard and thus discharge student loans.
The Federal Reserve reports that unpaid student debt has doubled since 2007 to around $1.3 trillion, with 40 million Americans having student loan debt averaging almost $30,000. The Democrats keep trying to change things, only to be met with a filibuster in the Senate that kills any hope of relief. Senator Elizabeth Warren (D-Mass.), herself a former teacher of bankruptcy law (and a friend of mine) for years now has decried the fact that the federal government bailed out the banks with TARP billions of dollars loaned at ALMOST NO INTEREST RATE while projected to make over $127 billion dollars in profit from student loans over the next ten years. Just two days ago her bill to allow Americans with student debt to refinance at a lower rate was given a favorable vote in the Senate of 58-38 (with some minimum Republican support while all of the negative votes were Republican), but the bill nonetheless failed. Why? Because 60 votes is needed to cut off a filibuster, and 58 votes won’t do it. I’ve thundered before against the stupidity of having to have a “supermajority vote” that filibuster rules require (see “Related Posts” below), and here again that stupidity prevented badly needed progress on this issue. As her recent (and terrific) autobiography, “A Fighting Chance,” demonstrates—the audio book, which she reads herself is particularly fascinating—Senator Warren worked for years to prevent Republicans from pushing through anti-consumer changes in the Bankruptcy Code, only to be overwhelmed finally in 2005 when BAPCPA was enacted.
Congress is now so deadlocked that legislative relief for student loan debt is not coming soon. The Republicans have control of the House of Representatives and are hoping this fall’s election will give them a majority in the Senate (they need a gain of six seats). If that happens then Congress will be able to pass legislation (though the filibuster in the Senate will now switch and aid Democrats in creating a roadblock), but that legislation will certainly not be pro-consumer. It will be pro-banking lobby.
If you’ve not yet taken out any student loans, don’t do so unless you are certain you will be able to repay them. Instead work part time during college and pay for your degree as you go. If you must take out loans, get them from your parents, or take out loans that are not earmarked for student educational purposes (i.e., general loans), which would be dischargeable in bankruptcy.
“Killing the Filibuster and Letting the Majority Rule in the Senate,” December 31, 2013
“Elena Kagan and Me,” March 23, 2010 (about Elizabeth Warren)
“A Guide to the Best of My Blog,” April 29, 2013