Around 45 million Americans owe a total of $1.6 trillion in student loans, and approximately 20 million of those debtors are not paying them back. Betsy DeVos, President Trump's Education Secretary, admitted more than a year ago that only one out of four student borrowers was paying down principal and interest on their federal loans. "In the commercial world," DeVos observed, "no bank regulator would allow this portfolio to be valued at full, face value."
So why not just forgive all this festering debt--debt that is preventing struggling Americans from buying homes, having children, or saving for their retirement?
That notion is now a mainstream idea in American politics. Senator Bernie Sanders got the ball rolling when he called for wiping out all this debt. Senator Elizabeth Warren proposed something slightly less radical--forgiving student debt up to $50,000. And Joe Biden, the Democrats' presumptive nominee for the Presidency, wants to forgive all debt owed by individuals who attended a public university or a historically black college (HBCU).
Even Al Jazeera, an Arabic-focused news organization, based in Qatar, wants to forgive all federal student loan debt. America is experiencing its worst economic crisis since the 1930s, Al Jazeera reporters pointed out, and the U.S. needs to prioritize relief for "people, not profit." Al Jazeera calls for canceling all student loan debt, which would "help those hit hard by the coronavirus pandemic to "rebuild their futures."
Writing off all federal student debt is not a crazy idea, especially, as I just said, a bunch of it isn't being paid back anyway. But does Congress have the political will to do it? I don't think so.
After all, the straightforward solution to this crisis would be to simply allow overwhelmed debtors to discharge their student loans in bankruptcy. Bills have been introduced in Congress that would accomplish just that, but those bills have gotten nowhere.
I've said this before, and I will repeat it. Congress should allow insolvent Americans to file for bankruptcy and discharge their student loans like any other consumer debt: credit cards, car loans, and business obligations.
And all Congress needs to do to accomplish this sweeping reform is to remove two words from the U.S. Bankruptcy Code: "undue hardship." It is the "undue hardship" language, after all, that the federal courts have interpreted so harshly, and which has denied bankruptcy relief to millions of honest student-loan debtors.
Of course, if Congress abolished the "undue hardship" standard, it would need to appoint a lot more bankruptcy judges to deal with a torrent of bankruptcy filings. And the judges would need to make sure that people who have the financial wherewithal to repay their loans don't fraudulently apply for bankruptcy relief.
In my view, calls to wipe out all student debt are irresponsible because politicians know this is never going to happen. Bankruptcy reform provides an orderly and fair way to give unfortunate student debtors a fresh start while guarding against fraud.