This weekend, Kevin Carey, head of New America’s Education Policy Program, penned a piece for the New York Times featuring the story of Liz Kelley, a parochial school teacher whose student loan balance has ballooned to $410,000.
As with most Times pieces on higher education, the piece has caused quite a stir (see here, from Don Heller at Michigan State; or the article’s comments section; or Twitter), and is serving as a kind of Rorschach test for people with opinions on college affordability and debt. Some fear that descriptions of anomalous loan balances accrued on loans provided by the federal government will lead to the institution of underwriting student loans—thereby limiting access to poor students or students who want to study in non-lucrative fields that provide a tangible (think social work) or intangible (think English) benefit in the labor force. For others, that would be a feature and not a bug.
But my takeaway from the article wasn’t that we should be underwriting student loans, but rather how weak and complex the backend protections are for people who do fall behind on their debts when life gets in the way.
Kelley, the article’s protagonist, managed to accumulate student debt from her undergraduate education at a private college, followed by a stint in law school and a graduate teaching program (including a brief time in a Ph.D. program), and finally through Parent PLUS loans after her children had maxed out their federal loan eligibility. Like anyone else who has been frustrated by high-interest private or graduate school loans, Kelley found her balance had spiraled upward due to hundreds of thousands of dollars in accrued interest. But she also faced some debilitating luck – including a rare medical condition, concentrated effects from the Great Recession, and a divorce – that left her unable to make a dent in her loan payments and forced her to cash out her pension fund.
There’s recourse available to people who find themselves in cycles of unpayable debt; it’s called bankruptcy. Unfortunately for student debtors, education loans are exceedingly difficult to discharge in bankruptcy, which makes little sense in an era where college is unattainable for most without student loans, and where student debt is the highest form of non-mortgage debt in the economy. We argue this in a new brief released last week that goes through the legal and policy history behind the treatment of student debt in bankruptcy.
The case against allowing student loans to be discharged mostly rests on fears of moral hazard—that an army of young people will get rich quick by racking up debt, discharging it upon graduation and spending the next few decades rebuilding their credit while federal taxpayers pick up the tab. A non-partisan commission debunked this theory in the late 1990s, finding that “available evidence does not support the notion that the bankruptcy system was systematically abused when student loans were more easily dischargeable.” In essence, these were phantom fears, but this didn’t stop Congress from making it far more difficult to discharge both federal and private student loans over the course of four decades.
The thing is, students have never been allowed to engage in the “nightmare scenario” of walking away from debt upon graduation. When student loans were treated the same as most consumer debts (prior to and during the 1970s), borrowers still were required to repay student loans for five (and later seven) years before being able to allege that student loans presented an “undue hardship.”
Our bankruptcy code has plenty of protections to prevent abuse of the system. Any student debtor in a universe where loans were dischargeable would still have to satisfy a “means test” like others filing for Chapter 7 bankruptcy. And it’s unclear how borrowing for tuition, fees, and living expenses should stick with someone any more than credit card debt—which can be taken on in service of virtually anything (including, yes, tuition and fees).
Beyond bankruptcy, I took Carey’s piece to also implicitly argue for the improvement of loan forgiveness and income-based repayment programs, not to mention better servicing. Its mention got little attention toward the end, but starting next year Ms. Kelley could and should be eligible for Public Service Loan Forgiveness for all federal loans she took out for herself after 2007. Whether or not loan forgiveness should be targeted better or earlier (or incrementally) is a matter of debate, as is whether or not graduate school programs, in particular, should be held accountable on measures of cost or debt.
Rather than underwriting loans, Carey seems to be arguing for the institution of loan limits on graduate school PLUS loans, similar to those imposed on undergraduates (who currently can only borrow up to $57,500). Color me unconvinced that this would be a silver bullet—after all, prices are rising pretty darn quickly for undergraduate programs even with loan limits in place—but it may slow costs or limit borrowing at some of the more unscrupulous graduate programs.
But the bottom line is that right now, it’s outrageous that someone can make basically reasonable decisions—go to college and graduate school, take out loans for kids once they’ve maxed out their borrowing—but be unable to rehabilitate or see any relief after a debilitating medical condition and divorce in the backdrop of the worst recession in generations. This is pretty low-hanging fruit, and it's the kind of thing that our centuries-old series of bankruptcy laws are supposed to cover.