Bipartisan Senate Bill Would Permit Debtors to Cancel Student Loans in Bankruptcy After 10 years: Too Good To Be True?

 Is this the year of Jubilee? Is this the year that distressed student-loan debtors finally get to shake off mountainous debt in the bankruptcy courts? 

Maybe.

This week, Senator Richard Durbin, an Illinois Democrat, and Senator John Cornyn, a Texas Republican,  filed a bill that would allow college-loan debtors to discharge their federal student loans in bankruptcy after a ten-year waiting period.  

This bipartisan bill, titled the Fresh Start Through Bankruptcy Act, would also require colleges with high student-loan default rates to partially repay the government for the cost of discharged loans.

 Will this bill make it through Congress? After all, Senators Elizabeth Warren and Claire McCaskill filed legislation to stop the Department of Education from garnishing the Social Security checks of elderly loan defaulters. That proposal went nowhere. And Representatives John Delaney and John Katko filed a bill to take the "undue hardship" language out of the Bankruptcy Code, and that bill died a quiet death.

I am enthusiastically in favor of the bill filed by Senators Durbin and Cornyn. I hope it passes. 

But if it does, Congress will need to repeal the Grad PLUS Act, which allows students to borrow unlimited amounts of money for graduate school. We can't let someone run up a quarter of a million dollars in student-loan debt getting a doctoral degree in music theory, and then shed all that debt after ten years.

And we will undoubtedly need more bankruptcy judges. Approximately 45 million people are carrying student loans. Several million of them will be immediately eligible for bankruptcy relief if the Durbin-Cornyn bill passes. That's a lot of people showing up at the nation's federal courthouses.

Congress will also have to address the abusive for-profit college industry if overburdened student debtors get access to the bankruptcy courts.  As student debt gets cleared through bankruptcy, it will quickly become evident that many bankrupt student borrowers acquired their debt at for-profit colleges.

But perhaps those are reforms for another day.

I have been arguing for bankruptcy relief for student-loan debtors for more than 20 years. If the Durbin-Cornyn bill passes, what will I write about? 

I may have to say, as the Lone Ranger often observed at the end of his weekly television show, "My work here is done."

On the other hand, who really believes Congress will do the right thing?

The Lone Ranger: "My work here is done."

Senator Elizabeth Warren's Proposal to Cancel Student Debt: A Great Idea (Just Needs a Little Tweaking)

Earlier this week, Senator Elizabeth Warren astonished the higher education community (and me in particular) by announcing three bold proposals: 1) free undergraduate education at public universities; 2) massive student-loan forgiveness, and 3) a ban on federal funding for for-profit colleges.

Student-loan debtors all over America should stand up and applaud Senator Warren. She is the first national political figure to call for an end to federal aid for the for-profit colleges. This sleazy racket gets about 90 percent of its revenues from federal student-aid money. If Congress shut off that spigot as Warren proposes, most of them would close in less than 30 days.

The for-profit college industry, with its armies of lawyers and lobbyists, has Congress in its back pocket. They surely understand that Senator Warren's proposal is an existential threat. Watch how this sleazy racket starts shifting resources to sabotage Warren's presidential bid.

On the other hand, Warren's call for free college education is not original. Senator Bernie Sanders promised free college during his 2016 presidential run and Senator Kamala Harris has put free college on her campaign platform. Nevertheless, it's a good idea.

It's Warren's third proposal, however, that is the real stunner. She's calling for massive student-loan debt forgiveness for 95 percent of student borrowers.

Senator Warren's student-loan forgiveness plan is a little complicated and has some limitations. she wants to forgive up to $50,000 in student-loan debt but would reduce this benefit for high-income families.  But her basic idea is sound. Why?

First of all, millions of Americans will never pay back their student loans whether Warren's proposal is implemented or not, so we might as well forgive the debt. Almost 8 million people are in income-based repayment plans (IBRPs) that allow them to make monthly payments based on their income and not how much they owe.  For most of these people (almost all of them actually), their loan payments are so small that they don't cover accruing interest.  For people in IBRPs, their debt grows larger each month as interest accrues. They will never pay back the amount they borrowed.

Several million more student-loan borrowers have their loans in deferment while the interest accrues and capitalizes on their original debt. Most of those folks will never repay their loans.

Finally, there is a good argument that forgiving all this student debt--$1.56 trillion--would boost the economy. Unburdened by debt they will never repay, millions of Americans will be able to rejoin the middle class--buy houses and cars, have children, save for retirement.  Indeed, a study by researchers at Bard College's Levy Institute makes that very argument.

Conservatives recoiled in horror at Warren's proposal to forgive student debt, spewing a lot of blather about the sacred nature of contract obligations, the unfairness to people who paid off their student loans, etc.

But in my view, Warren's student-loan forgiveness proposal does not go far enough. Millions of student-loan debtors are entitled to student-loan forgiveness with no $50,000 cap. And millions of parents have co-signed student loans or taken out Parent PLUS loans, and they also are entitled to relief.

So I propose a few tweaks to Senator Warren's brave proposal:

First, all Parent Plus loans should be forgiven immediately for any family with household income under $200,000. And all parents and relatives who cosigned private student loans should be relieved of any legal obligation to repay that debt.

Secondly, instead of instituting a loan-forgiveness plan, I propose that distressed student-debtors be allowed to discharge their student loans in bankruptcy as proposed in Representative John Katko's recently filed bill. People who took out student loans to go to law school and then got rich as corporate lawyers should pay back their loans. But people who otherwise qualify for bankruptcy relief should be able to discharge their student loans like any other consumer debt.

But let's not quibble about the details. Senator Warren's call for free college and student-loan forgiveness are basically good ideas. And her call for shutting off federal aid to the for-profit colleges is stunningly brave.

In my view, it is time to stop heckling Senator Warren about Cherokee-Gate. She is a serious presidential candidate who has made bold and thoughtful policy proposals. Americans should listen to what she has to say about the student-loan crisis because--let's face reality--a lot of student-loan debt will never be paid back.

References

Elizabeth Warren. I'm calling for something truly transformational: Universal free public college and cancellation of student loan debt. Medium, April 22, 2019.

Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum. The Macroeconomic Effects of Student Debt Cancellation. Levy Economics Institute of Bard College, February 2018.

Rep. Maxine Waters didn't ask mega-bank executives a stupid question at a congressional hearing; She asked them the wrong question

Congresswoman Maxine Waters, Chair of the House Financial Services Committee, asked seven big-bank executives an ignorant question when she had them appear before her committee earlier this week.

“What are you guys doing to help us with this student loan debt?" Waters asked the bankers.  Three of them  separately informed Waters that their banks have been out of the federal student-loan business since 2010, when the federal government began dispersing student loans directly. 

Ms. Waters apparently didn't know that, which must have been embarrassing to her. Nevertheless, Waters did not ask a stupid question. She asked the wrong question. In fact, several banks are involved in the private student-loan market: Wells Fargo, Citizens Bank, Suntrust, and Sallie Mae--to name a few. 

And it is a dirty business. Several banks are bundling their private student loans and selling them to investors as student-loan backed securities called SLABS, very much like the mortgage-backed securities that went south during the 2008 home-mortgage crisis. 

Moreover, most banks require student borrowers to find co-signers for their private student loans, which usually means Mom and Dad.  If a student defaults on a private student loans, the co-signer is on the hook to pay back the debt.  Can a co-signer discharge a child's student loan in bankruptcy? Probably not.  When Congress passed the so-called Bankruptcy Reform Act in 2005, it inserted a clause in the Bankruptcy Code making private student loans nondischargeable in the absence of "undue hardship."

So this is the question Congresswoman Maxine Waters should have asked the bankers who were arrayed before her at the Financial Services Committee hearing yesterday. "Do you support a change in the Bankruptcy Code that would make student loans dischargeable in bankruptcy like any other consumer debt?"

Put another way, she might have asked the bankers if they support Representative John Katko's bill to remove the "undue hardship" language from the Bankruptcy Code, which would allow destitute debtors to shed burdensome student-loan debts in the bankruptcy courts. How would the bankers have answered if Maxine Waters had asked them the right question? 

And here are a two questions for Congressman Waters:

Do you support Congressman Katko bill, which calls for taking the "undue hardship" language out of the Bankruptcy Code? 

Will you agree to be a co-sponsor of Representative Katko's bill, even though Mr. Katko is a Republican?

Megabank CEOs: "We don't know nothin' bout no student loan program."

Bankruptcy Relief Bill H.R. 2366, "Discharge Student Loans in Bankruptcy Act of 2017": Does it have a prayer of becoming law?

Earlier this month, Congressmen John Delaney (D-Maryland) and John Katko (R-New York) filed a bill in the House of Representatives that would eliminate the "undue hardship" rule contained in 11 U.S.C sec. 523(a)(8). H.R. 2366, if adopted into law, would put student loans on par with credit card debt and other consumer debt, making student loans more easily dischargeable in bankruptcy. As Congressman Delaney put it, "It doesn’t make sense for students with heavy debt burdens to be worse off than someone with credit card debt or mortgage debt."

How many student borrowers would qualify for bankruptcy relief if the Delaney-Katko bill becomes law?

This could be a very big deal. If "the undue hardship" rule is struck from the Bankruptcy Code, millions of student borrowers could seek relief from their student loans.  How many millions?

We know from looking at a 2015 Brookings Institution report that nearly half the people from a recent cohort of borrowers who took out student loans to attend for-profit colleges defaulted within five years.  Clearly, a great many of these people would qualify for bankruptcy relief.

And the Federal Reserve Bank of New York reported recently that a third of student borrowers who owed $5,000 or less defaulted in five years, while 18 percent of the people who borrowed $100,000 or more defaulted.  Assuming these defaulters are insolvent, nearly all them would be eligible for bankruptcy relief if the Delaney-Katko bill becomes law.

Who will opposed this legislation?

Obviously, most of the 44 million people weighed down by student-loan debt will support this bill. Who will opposed it?

The bill would give bankruptcy relief for people who took out both federal student loans and private student loans. Private lenders who are heavily invested in the student-loan business--Wells Fargo, Sallie Mae, etc.--will oppose this bill fiercely; and their lobbyists are probably already at work.

The nation's colleges and universities will also oppose this bill, but they won't be vocal about it. It is hard for universities to insist on getting billions of dollars in federal student-aid money every year while publicly opposing relief to people who went broke because they borrowed too much money to attend college.

But make no mistake: the colleges and universities understand that the Delaney-Katko bill, if it becomes law, will unleash a floodgate of bankruptcy filings; and this deluge will force Congress to clean up the student-loan scandal.  The colleges want the party to last a little while longer; and this legislation will help bring the party to an end if it ever gets enacted.

In the past, beneficiaries of the student-loan boondoggle  have used lobbyists and campaign contributions very effectively  to protect their interests, while student debtors suffered in silence. But the tables may be about to turn. More than 40 million people are burdened by student-loan debt, and these people vote.

Will the Delaney-Katko bill become law?

What are the chances that the Delaney-Katko bill will become law? It is hard to say. A bill was introduced several years ago to stop the government from garnishing Social Security checks of student-loan defaulters and that bill never made it out of committee.

So it is possible, that this bill will go nowhere.  Nevertheless, I am impressed by the fact that the Delaney-Katko bill has been framed as a bipartisan initiative. So far, it has at least ten co-sponsors:

Debbie Dingell (D-Michigan)
Paul Tonko (D-New York)
Kyrsten Lea Sinema (D-Arizona)
Zoe Lofgren (D-California)
*John Delaney (D-Maryland)
*John Katko (R-New York)
Edwin Perlmutter (D-Colorado)
Alan Lowenthal (D-California)
Catherine Castor (D-Florida)
Marc Veasy (D-Texas)

Let's all write our elected representatives and express our support for the Delaney-Katko bill.

The Delaney-Katko bill, if it becomes law, will afford relief to millions of people who have been pushed out of the economy by student loans. Let's watch this bill closely and give it all the support we can.

Every student-loan debtor should write his or her Senator and Congressperson to express support for the Delaney-Katko bill. They should stress that this proposed legislation is not radical. In fact, scholars and policy makers have advocated for years that distressed student-loan debtors should have easier access to the bankruptcy courts.

And let's take a moment to salute the political courage of Representative John Katko of New York--the first Republican to support this legislation.

Rep. John Katko (R-New York): Profile in Courage

References

Representative John Delaney press release. Delaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt, May 5, 2017.

Representative John Katko press release. Reps. Katko and Delaney File Legislation to Help Americans Struggling with Student Loan Debt. May 8, 2017.