Almost 37 million people
owe money on their college loans, and millions are in default or behind on
their loan payments (Brown et al. 2012). Most overburdened student-loan debtors
suffer their college-loan debt in silence, and the public is generally unaware
of their plight. In a few cases, however, student-loan debtors file for
bankruptcy, seeking a discharge from the loan obligations. Often the court
decisions in these cases provide details of a particular student-loan debtor’s
financial situation. In particular, the Hedlund
case (2012) provides a window
into the world of the underemployed law-school graduate who is swamped by
massive student-loan obligations.
A Young Man
Borrows Money to Go to Law School But Can’t Pay Back the Loans
In the early 1990s, Michael
Eric Hedlund borrowed more than $85,000 to go to law school. It must have
seemed like a good idea at the time. Michael’s father and brother were
attorneys, and he anticipated going to work in his father’s law firm.
Things did not work out
as Michael hoped. After graduating from Willamette University’s law school in
1997, Michael took a job in the District Attorney’s office in Klamath Falls,
Oregon. He planned to work there for a couple of years and then join his
father’s law firm. Unfortunately, Michael failed the bar exam twice. Unable to
practice law, he received several extensions on his loan obligations. He
applied for a student-loan consolidation, but was told he was ineligible for
consolidation because he was not current on his loan payments.
In 1999, Michael found a
job as a juvenile counselor, which paid him about $40,000 a year. His monthly loan payments were $800, which he
did not pay regularly. In fact, he only made one loan payment. In 2002, two loan creditors began garnishing
his wages; and in May 2003, Michael filed for bankruptcy.
proceedings stretched on for years. In fact, the original bankruptcy judge who
presided over his case died before the case was resolved. In March 2012--nine
years after Michael filed for bankruptcy, a federal district court ruled that
Michael was not entitled to discharge his student loans in bankruptcy. According Judge Ann Aiken, Michael was not
entitled to bankruptcy relief because he had not made a good-faith effort to
pay on his loans.
Pathetic Plight of Many Law School Graduates
Although Judge Aiken rejected
Michael’s plea to have his student loans discharged, she was not
unsympathetic. Judge Aiken pointed out
that law school tuition rose more than three hundred percent between 1989 and
2009, which is twice the rate of inflation for that period and four times the
rate of job growth. “Accordingly,” Judge Aiken observed, “with the exception of
the independently wealthy, students must take out loans in order to finance
their [law] degrees” (p. 907).
Meanwhile, as tuition
costs keep going up, wages for beginning attorney are going down. Citing a
report by the National Association for Law Placement, Judge Aiken pointed out
that annual compensation for first-year associate attorneys in private practice
went down in 2010. In addition, the
demand for new attorneys is shrinking. According to Judge Aiken, “The most
recent statistics indicate that, through the year 2018, there will only be
25,000 openings for the law schools’ 45,000 new graduates each year” (p. 907).
In Judge Aiken’s opinion,
“[T]he current higher education system is untenable and unsustainable; as a
result, increasing numbers of students will be forced to file for bankruptcy”
(p. 908). In the judge’s view, the student loan issue--she did not use the word
“crisis”--needs to be addressed at a systematic level.
What is the
Significance of the Hedlund Case?
Judge Aiken’s opinion in
the Hedlund case paints a poignant
picture of the plight of underemployed law-school graduate who borrowed heavily
to attend law school. As Judge Aiken
pointed out, law school tuitions are now so high that most people must borrow
money--a lot of money--to get a legal education. A few years ago, borrowing
money to get a law degree was a good bet, but the demand for new lawyers is
shrinking and salaries for beginning attorneys are going down. Thousands of law school graduates are finding
themselves underemployed in jobs outside the legal field and unable to pay back
their student loans. Obviously, this is
a huge national problem, not only for law-school graduates, but for law schools
and for the legal profession as well.
Under federal bankruptcy
law, student-loan debtors cannot discharge their student loans in bankruptcy
unless they can show “undue hardship.” Most
law-school graduates are able to find some kind of employment and thus will not
qualify for a bankruptcy discharge under this rigorous standard. Mr. Hedlund, for example, found a non-legal
job paying $about 40,000.
Nevertheless, most underemployed
law school graduates who have massive student loans will be in dire economic circumstances. Mr. Hedlund was obligated to pay $800 a month
on his loans after he graduated, almost an impossible burden for someone making
$40,000 a year.
Unable to discharge their
student loans in bankruptcy, a lot of underemployed law-school graduates will
be forced to apply for an Income-Based Repayment plan (IBR) in order to manage
their loan obligations. Under an IBR, as modified by the Obama administration,
debtors will obligate themselves to pay 10 percent of their discretionary
income for a period of 20 years (White House, 2012).
Obviously, IBR plans are
not an ideal solution for law-school graduates who can’t find well-paying jobs.
Instead of beginning good careers practicing law, many graduates will wind up
being long-term indentured servants to the government, forking over a percentage
of their income over a 20-year period. If Michael Hedlund ultimately chooses
the IBR option, he won’t be free of his law-school loan obligations until he is
in his 60s. Somehow, that does not seem
Brown, M., Haughwout, A., Lee, D., & Mabutas,
M. (2012). Grading student loans. Federal Reserve Bank of New York.
Hedlund v. Educational
Resources Institute, Inc., 468 B.R. 901 (D. Or. 2012).