The Next Financial Crisis Is Upon Us
For many, a college education is one very important part of achieving the American dream. Post-graduate degrees have traditionally lead to higher paying jobs and have allowed many of us to enjoy a higher standard of living. Over the course of the past 30 years, 37 Million Americans have funded their “dream” with Student Loans; 6 Million of those borrowers are in default. Student Loan debt has surpassed credit card debt and auto loan debt at $1 Trillion dollars.
The Staggering Statistics
In March of 2012, the Federal Reserve Bank reported that 47% of outstanding Student Loans were in deferment or forbearance. 27% of Student Loan borrowers are delinquent and the default rate is almost 20%. The lives of those who borrowed for a dream have become a nightmare. For some, the only solution is suicide. Tragically, the highest suicide rate for Student Loan debtors is for law school debt.
The Disastrous Fallout of Delinquency or Default
Federal law requires servicers of Perkins, Federal Family Education and Direct Loans to report delinquent and defaulted loans to national credit bureaus. A derogatory report on a delinquent or defaulted Student Loan can drop a credit score of 750 a whopping 75 points to a score of 675. A negatively impacted credit score can severely impact your ability to obtain credit for basic needs like housing or auto loans. The default rate of a college also affects that college’s ability to obtain additional federal funding to offer more Student Loans. So – both the borrower and colleges are impacted by the fallout of delinquency or default on Student Loans.
How Did We Get Here?
FDR enacted the GI Bill in 1944 which provided veterans with federal benefits to attend college. LBJ enacted the Higher Education Act in 1965 to provide a public funding for Student Loans. In 1972, Richard Nixon created The Student Loan Marketing Association (Sallie Mae) to provide government guaranteed loans. Sallie Mae was eventually privatized and controlled the Student Loan market in the 1990’s. In response to criticism of Sallie Mae’s policies and procedures, Bill Clinton created the Federal Direct Loan Program in 1993. Today, there are a multitude of government backed Student Loan programs in addition to private loan servicers.
The Draconian Collection Power of Student Loan Servicers
Since 1981, Student Loan servicers have contracted with private collection agencies to collect defaulted loans. In 1998, the US Department of Education established performance based debt collection contracts awarded after a competitive bidding process. These debt collectors – like any other – get paid based on the money they recover.
However, unlike any other creditor, Student Loan servicers are exempt from compliance with Consumer Protection laws like the Fair Debt Collection Practices Act. Sallie Mae used its massive lobbying power to obtain Congressional approval of this exemption. Student Loan servicers are also exempt from adhering to basic Constitutional due process rights or any statute of limitations. Federal law gives these servicers administrative authority to garnish wages, income tax refunds and even social security retirement benefits. The lobbying efforts – lavish parties, trips, private jets, and campaign contributions – influenced Congress to ignore basic Constitutional Rights and Consumer Protection Laws when it comes to Student Loan borrowers.
Bankruptcy Law Severely Limits the Discharge of Student Loans
Congress also protects all Student Loans – both private and public – from discharge under any Bankruptcy proceeding unless “undue hardship” can be shown. The standard for “undue hardship” is nearly impossible to meet. One Bankruptcy Judge told a borrower seeking to discharge her Student Loans that she” would have to show up in a wheel chair” before he would consider discharging any of her Student Loans.
Unlike any other federally guaranteed loans, Student Loans are the only government backed loans that are excepted from discharge in bankruptcy. Student Loans are treated the same as fraudulent transactions, domestic support obligations, back taxes, and other exceptions to discharge. Despite the benefit provided to our nation by an educated populace, Student Loan borrowers are given less protection than debtors who rack up obscene levels of credit card debt, cash advance debt and gambling debt.
The Tears of John Boehner
John Boehner is famous for his “tears of joy” after he was elected Speaker of the House of Representatives. In 2004, a dry eyed Boehner spoke at a Sallie Mae gala and told the loan servicer:”Know that I hold you in my trusted hands, I have enough rabbits up my sleeve to be able to get where we need to.” No video has been posted of Boehner crying at the funeral of a Student Loan victim driven to suicide by the unbearable burden of their defaulted Student Loan debt. The draconian collection powers granted to Student Loan servicers by Congress are surreal. One grieving mother reported that a Student Loan collection agency called her while she was dressing for her son’s funeral demanding payment on the defaulted Student Loans that had caused her son to put a gun to his head.
The Student Loan Crisis is a Real Threat to Our National Security
The Student Loan crisis is one of epic proportion. In 2008, Congress appropriated $700 Billion dollars to bail out the big banks and save the economy from collapse. The foreclosure crisis ensued and houses were lost and family units were destroyed. More than one family has moved into the basement of their parents home just to survive as a family unit. Congress turned a blind eye to alternatives that would have saved millions of homes from foreclosure. Instead, they were lead by the big money interests. Unfortunately, the same thing is happening with Student Loans.
The Student Loan crisis threat is a “Real” threat to our national interest and security. How can a nation build a tax base with college educated professionals and others that are strapped with burdensome and oppressive Student Loan repayment obligations? Borrowers who are unable to buy houses, cars and other needs necessary to raise a family will be forever burdened by their Student Loan debt.
Congress did enact the College Cost Reduction and Access Act in 2007 which reduced interest rates on certain types of Student Loans. This Act also provided 2 new programs that will benefit graduates who take low paying and public interest jobs, including Income Based Repayment and Loan Forgiveness for Public Service Employees. The success and continuation of this program provides some ray of hope for Student Loan borrowers.
The Money Machine
Federal law allows Student Loan servicers to assess penalties and interest that are capitalized to allow interest to accrue on interest. Some commentators suggest that the Student Loan servicers, including the U.S. Department of Education, make more money off defaulted loans than loans that are timely paid. Recently, Ralph Nader opined:”The corporate lawyers who conceived this self-enriching system ought to get the nation’s top prize for shameless perversity.”
Loan servicers are not the only beneficiaries of liberal Student Loan lending policies. Student Loans have funded the endless brick and mortar projects at colleges across the country, including new gyms, libraries and elaborate student centers. Student Loans have also funded the generous salaries for college administrators and professors
The Financial Aid Offices at Colleges: Treat and Trick
For the past 30 years, colleges have passed out Student Loans like Halloween candy. You submit an application and get a check. Unfortunately, many students didn’t bother to read the “candy wrapper.” Very few students understand the terms and conditions attached to the loans. The same is true as to any knowledge of eventual monthly payments. Financial aid offices offer little help in this regard. Students accumulate massive student debt and then are shocked when they receive the repayment statement. In many cases, the receipt of their first statement is the first time Student Loan borrowers actually know what their monthly payment will be. More often than not, borrowers are shocked to learn that they have unwittingly committed themselves to a life of involuntary servitude.
Default: The Dream Turns Into a Nightmare
Most college graduates didn’t plan on defaulting. But with dismal unemployment rates and stalled economic growth – graduates can’t find the high paying jobs that need to pay their Student Loans. Graduates struggle just to make ends meet and have no means to repay their Student Loans. As a result, many borrowers simply default. They grow frustrated with their attempts to negotiate “affordable reasonable” payment plans and simply give up.
Once in default, the borrower becomes ineligible for deferment, forbearance or any reasonable repayment programs. Defaulters are also deemed ineligible for additional Student Loans to help further their education and improve their employment options. Defaulted borrowers are also deemed ineligible for other federal loan programs, like home loans or small business loans. A ruined credit rating prevents a defaulted Student Loan borrower from getting a job, renting an apartment, or establishing services like utility and phone service.
The dream of living a normal life – getting married, having kids, buying a house – is dashed. The dream becomes a nightmare.
Repayment Options Before Default
If a Student Loan has not defaulted, the government offers several options to help those who are having difficulty making payments, including Economic Hardship or Unemployment Deferments or Forbearance. Consolidation of various Student Loans with one servicer is also an option. In addition, there are a number of Repayment Plans that are designed to assist borrowers including: Graduated and Extended Plans, Income Based Plans, Income Contingent Plans, and Income Sensitive Plans.
After Default – Most Student Loan Borrowers Are Doomed
Once a Student Loan goes into default, borrowers face limited alternatives for curing the situation. Congress has done little or nothing to really help students facing defaulted Student Loans. There are a few federal programs available to help, but qualifying for them can be difficult. This is eerily similar to the mortgage modification programs (HAMP and HARP) that were difficult to obtain and provided false hope for many families.
Several options are available to borrowers regardless of the default status of the Student Loan. These include service based Loan Cancellation programs for teaching and other specific types of public employment or military service. In addition, there are provisions for relief based on a Total and Permanent Disability Discharge and other Administrative Discharge Relief provisions.
Borrowers may also be able to Rehabilitate their defaulted Student Loans by making 9 “reasonable and affordable” monthly payments on time within 10 consecutive months. But – the Rehabilitation process can be “tricky” when the borrower must negotiate “reasonable and affordable” payment plans.
A federal Income Based Repayment program offers defaulted Student Loan borrowers with a “partial financial hardship.” This program is also dependent on an application process and the negotiation and determination of a “reasonable and affordable” monthly payment.
Chapter 13 Bankruptcy
Although a full discharge of Student Loan debt through a Chapter 7 Bankruptcy proceeding may not be possible, Chapter 13 provides the perfect vehicle for assisting a borrower in curing Student Loan defaults. The “Automatic Stay” provision stops any collection actions and the borrower has an opportunity to challenge or object to the Student Loan servicer’s claim. In some cases, there also may be grounds to initiate an Adversary Proceeding against a Student Loan servicer for a declaration of rights and other relief.
Even though a Chapter 13 Proceeding will not result in the complete discharge of Student Loan debt, the 3 to 5 year plan will allow for the repayment of debts (including Student Loans) based on the Borrower’s income and their necessary and reasonable living expenses. Most importantly, the “Automatic Stay” protects the Borrower from over-reaching creditors – including the Student Loan servicers and their collection agents.
Under the Bankruptcy laws, a Borrower can conceivably file back to back Chapter 13 proceedings in perpetuity. Proper timing and strategy will allow the powerful “Automatic Stay” provisions to protect a Borrower from the most aggressive collection antics of performance driven Student Loan collection agents. And, despite the naysayers – the Bankruptcy Code is the most powerful tool in capitalist system. A Chapter 13 Debtor is entitled to enjoy a lifestyle within their means. They can still obtain credit to purchase a house or buy a car – under the supervision of the Chapter 13 Trustee and directive of the US Bankruptcy Court.
Conclusion: Congress Must Take Action
With the passage of the College Cost Reduction and Access Act, Congress has given Student Loan borrowers a glimmer of hope. However, Congress must act to assist borrowers who find themselves buried in debt with limited career opportunities and dismal job prospects as our depressed economy continues to struggle.
Moreover, Congress should reconsider the exclusion of Student Loan servicers from adherence to basic consumer protection laws and fundamental Constitutional rights. Finally, Congress should also take a look at the Bankruptcy Code and provide a more realistic standard of “undue hardship” as it relates to the dischargeability of Student Loans through Bankruptcy proceedings. Until then, a Chapter 13 Bankruptcy proceeding remains the only viable means – short of success with the administrative remedies in place – to address the Student Loan crisis.
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