Monday, November 26, 2012

Borrowing money at interest: The root cause of the student loan crisis

Many people underestimate the magnitude of the student loan crisis because they forget that student-loan debtors are borrowing money at interest and that this interest gets added to the amount borrowed if the borrowers get behind on their payments.

Thus, when we read the published bankruptcy court opinions, we see debtor after debtor who is trying to discharge a debt that is two times or even three times the amount they orginially borrowed. For example, in In re Bene (2012), Donna Bene borrowed about $17,000 in the 1980s to finance an education that she never completed due to the fact she had to leave school to care for her aging parents. She was unable to make her loan payments, and by the time she filed for bankruptcy, the amount of her debt, including fees and accrued interest, was $56,000--three times the amount she originally borrowed!

The York Times, the Obama administration, and other fuzzy-minded liberals think that economic hardship deferments and income-based repayment plans (IBRPs) provide meaningful relief for overburdened student-loan borrowers, but they  are apparently ignoring the fact that interest accrues while people participate in these programs. People who obtain economic hardship deferments for a period of even three or four years will find the amount they owe has grown substantially. 

The case of In re Halverson illustrates this phenomenon. Mr. Halvserson obtained economic hardship deferments on his student loans for many years and was never in default. Nevertheless, by the time he filed for bankruptcy, when he was in his 60s, his $132,000 debt and grown to almost $300,000.

Likewise, people who participate in IBRPs and whose adjusted payments are less than the accruing interest on their loans will discover the amount they owe will grow over the years--not shrink--because the interest is piling up even though they are making regular payments.

The student-loan guarantee agencies, which are the creditors in student-loan bankruptcy cases, have been asking the bankruptcy courts to put debtors on 25-year IBRPs, which is just crazy.  Ms. Bene and Mr. Halverson would have both been in their 90s before completing their IBRPS had they been required to do so. Fortunately, the bankruptcy courts discharged their debts and did not make these unfortunate people go through such a heartless and fruitless exercise.

There was a time--in pre-Reformation Europe--when loaning money at interest was considered sinful. And not so long ago, the states had enforceable usury laws that put limits on the amount of interest that could be charged on a debt.   In the jurisdiction where I practiced law, a creditor could charge no more than 10.5 percent on most debts.  Today, however, banks and credit card agencies are virtually unrestricted in the amount of interest they can charge.

Dorothy Day, the greatest American Catholic of the 20th century and co-founder of the Catholic Worker movement, subscribed to the ancient Catholic doctrine on usury, and she refused to accept interest on money owed to the Catholic Worker.  In 1960, she famously returned interest on money owed the Catholic Worker by the City of New York. The City had bought a piece of property from the Catholic Worker for $68,700, but there was some delay in making payment. When the check arrived, it included an additional $3,579.39 in accrued interest.

Dorothy sent the interest money back to the City of New York with this explanation (Day, 1963, p. 191):
We are returning interest on the money we have recently received because we do not believe in "money-lending at interest." As Catholics we are acquainted with the early teaching of the Church. All the early Councils forbade it, declaring it reprehensible to make money by lending it out at interest . . . .
Today, unfortunately, American society runs on borrowed money.  Presently, our government is keeping interest rates low for the expressed purpose of encouraging people to buy and borrow more. And where has all this borrowing gotten us? Americans now owe trillions of dollars in debt, including $1 trillion in student-loan debt alone.  College tuition is now so high at both public and private colleges that students are forced to borrow in order to get an education.

There is no easy way back from the abyss, but we can start by easing the burdens being borne by overstressed student-loan borrowers and by putting firm caps on college tuition costs.

References

Dorothy Day. Loaves and Fishes. Maryknoll, NY: Orbis Books, 1963.

In re Bene, 474 B.R. 56 (Bankr. W.D.N.Y. 2012).

In re Halverson, 401 B.R. 378 (Bankr. D. Minn. 2009).

 
 




1 comment:

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