Occupy Wall Street Needs a Clear Objective: How About Bankruptcy Relief for Overburdened Student-Loan Debtors?
Complete Article Below. (Originally published - December 15, 2011, Teacher's College Record.
Copyright Teachers College Record, 2011. http://www.tcrecord.org
ID Number: 16621.)
You can fool all of the people some of the time, Lincoln observed, and some of
the people all of the time. “[B]ut you can’t fool all of the people all of the
time.” The Occupy Wall Street protestors--huddled in tents and shanties in
cities across America--are some of the folks who are not fooled about economic
conditions in the United States. Conservative pundits revile the Occupy Wall
Street protestors as communists, anarchists, and criminals; and
counter-protestors hold up der isive signs that read, “Get a Job!”
But of course
that is the point. Many of the protestors are unemployed or severely
underemployed. If these people had good jobs they wouldn’t be camping in urban
parks or subjecting themselves to police beatings and arrest. No--the Occupy
Wall Street protestors are not wild-eyed radicals. Most are simply angry
Americans demanding economic justice. (Lacey, 2011). Unfortunately, the Occupy
Wall Street movement cannot achieve its goals for economic justice without
defining some clear objectives--which so far it has not done. It is not enough
to say Congress should tax the rich or regulate the financial sector better.
Occupy Wall Street needs to boil down its broad demand for economic justice to
articulate some clear and realistic political goals.
Default Rates Are Catastrophic
Let me suggest one plank for OWS’s
economic justice platform--bankruptcy relief for overburdened student-loan
debtors. Although the U.S. Department of Education won’t admit it, default rates
on student loans are catastrophic--especially for students who borrowed money to
attend for-profit colleges and vocational programs. Even by DOE’s own anemic
standard for measuring default rates, those rates have doubled over the past few
years (Blumenstyk, 2011).
And DOE’s rating system only measures defaults in the
first two years of the student-loan repayment period. When the measurement
period is expanded to three years--which DOE will soon do--the default rate
spikes dramatically--particularly for students who borrowed to attend for-profit
And even these numbers don’t tell the full story. Students who
qualify for economic hardship deferments are not making their loan payments, but
they are not counted as defaulters. Some for-profit institutions have encouraged
their students to apply for economic hardship deferments in order to keep their
institutions’ official student-loan default rates down. Unfortunately, for most
of the people who have economic hardship deferments, the interest on their loans
continues to accrue (In re Halverson, 2009). If student-loan debtors defer their
payments for just two or three years, they will see the outstanding balance on
their loans grow significantly--perhaps to an amount so high that they will
never be able to pay back their loans.
Some experts estimate that the
student-loan default rate for students who attended two-year for-profit
institutions is 40 percent (Field, 2010); and another analysis concluded that a
majority of students who borrowed money to attend for-profit institutions are in
default (Lewin, 2010). And of course a student-loan default subjects the
defaulter to a torrent of bad consequences. Their credit is ruined; they become
subject to all the wiles and torments of debt collectors; they can have their
income-tax refunds garnished; they can even have their Social Security checks
dunned (Fossey & Cloud, 2011; Cloud, 2006). In short, as a recent New York
Times editorial put it, defaulting student-loan debtors wind up in “financial
purgatory” (Editorial, 2011, p. A34).
President Obama’s Plan
for Student-Loan Relief Doesn’t Go Far Enough
To his credit,
President Obama recognizes the need to give overburdened student-loan debtors
some relief. Recently, his administration proposed to move the starting date
forward for a federal program that will give debtors the option of paying ten
percent of their income toward paying off their student loans over a period of
20 years--with the unpaid balance to be forgiven at the end of the 20-year
period. Kevin Carey proposed a similar model in a recent issue of Chronicle of
Higher Education (Carey, 2011).
President Obama’s plan is helpful, but it does
not go far enough. First of all, students who borrowed from private lenders
instead of the federal student-loan program are not eligible to participate.
Second, as currently designed, it will be awkward for students to participate
since they must reapply every year (Carey, 2011). But most importantly, the plan
contemplates that millions of former post-secondary students will subject
themselves to a repayment period that stretches over 20 years--the majority of
most people’s working lives.
Bankruptcy Relief is the Best Option for
Overburdened Student-Loan Debtors
American political leaders,
American universities, and the American people as a whole must face the fact
that the federal student-loan program is out of control, with total outstanding
indebtedness (including student loans from private lenders) approaching $1
trillion. Incredibly, student loan debt now exceeds the nation’s credit card
What went wrong? A lot of things.First, a significant number of students took out loans
for education programs that did not give them the skills necessary to earn an
income that is adequate to pay back their loans and have a decent lifestyle. For
example, some student-loan debtors enrolled in for-profit institutions that gave
them little value for their money. In fact, this has been a serious problem for
years. Now, a new group of student -loan debtors are under pressure--students
who borrowed money to obtain excellent educations--an ivy-league law degree for
example, but who can’t find jobs.
Second, colleges jacked up their tuition far above the nation's inflation rates, knowing that students would tamely borrow more money to pay their tuition bills. Tuition at for-profit colleges in particular, is outrageously high.
Bankruptcy, as originally envisioned in this
country, was intended to give overburdened debtors a fresh start. Until fairly
recently, that fresh start was available to any insolvent debtor, whether or not
the debtor made good financial decisions prior to going broke.
however, has barred student-loan debtors from the bankruptcy courts unless they
can show they will be subjected to “undue hardship” if they are not relieved of
their loans. The undue hardship standard, as interpreted by the courts, makes it
extremely difficult for student-loan debtors to obtain bankruptcy relief.
even debtors who think they qualify for bankruptcy relief under the undue
hardship standard must hire an attorney in order to obtain this relief (Pardo
&Lacey, 2009). Student loan debtors should have the same access to
bankruptcy that other insolvent debtors have--for example, the person who
borrowed money to start a business that was not successful; the person who
accumulated a mountain of debt due to a medical bills; or an individual who was
financially ruined by divorce or other unfortunate life event.
Bankruptcy Relief for Student-Loan Debtors is Not a Radical Idea
Bankruptcy relief for overburdened student loan debtors is not a radical
idea. The National Bankruptcy Review Commission (1997)--hardly a radical
entity--recommended this reform almost fifteen years ago. Unfortunately,
Congress assumes that allowing student-loan debtors to discharge their debts in
bankruptcy will encourage people to abuse this privilege; although there is no
evidence to support that conclusion. Prior to Congressional action in 1976,
student loan debtors were not barred from discharging their student-loan debts
in bankruptcy, and the record shows no pattern of abuse (Pardo & Lacey,
If Congress is concerned about students filing for bankruptcy immediately
after graduating from college, it could ban student-loan debtors from filing for
bankruptcy until five years after the loan repayment period begins. In fact, in
1976, Congress passed a law that imposed a five-year waiting period before
debtors could discharge their student-loan debts unless they could show an undue
hardship (Education Education Amendments of 1976). Later, however, Congress
changed the law so as to impose the undue hardship condition for discharging
student loans no matter when a debtor files for bankruptcy. In any event, it is
a crime to use the bankruptcy courts to commit fraud. If a student-loan debtor
abuses the bankruptcy process to discharge loans that the debtor has the ability
to pay, adequate processes are in place to detect that abuse and prosecute the
Conclusion: OWS Should Demand Bankruptcy Relief for
Reasonable access to the bankruptcy courts for
overburdened student loan debtors should become Occupy Wall Street’s battle cry.
Of course this cannot be the only item on an economic justice agenda, but the
student-loan crisis is causing hardship for millions of Americans; and
bankruptcy is a fair and reasonable option for providing some relief.
Blumenstyk, G. (2011, May 20). Default Rate on Federal Student Loans Jumps to 8.9%, a Nearly Two-Point Rise. Chronicle of Higher Education Online. Available at: http://chronicle.com/article/Default-Rate-on-Federal/127602/
Carey, K. (2011, October 28). The U.S. should adopt income-based loans now. Chronicle of Higher Education, p. A96.
Cloud, R. C. (2006). Offsetting Social Security Benefits to Repay Student Loans: Pay Us Now or Pay Us Later. Education Law Reporter, 208, 11.
Editorial: Help needed for Student Debtors (2011, September 15). New York Times, p. A34. Education Amendments of 1976, Pub. L. No. 94-482, tit. I • 127(a), 90 Stat. 2081, 2141, codified at 20 U.S.C. • 1087-3 (repealed 1978). Field, K. (2010, July 11). Government vastly undercounts defaults, Chronicle of Higher Education Online. Available at: http://chronicle.com/article/Many-More-Students-Are/66223/
Fossey, R. & Cloud, R. C. (2011). From the cone of uncertainty to the dirty side of the storm: A proposal to provide student-loan debtors who attended for-profit colleges with reasonable access to bankruptcy court. Education Law Reporter, 272, 1-18. In re Halverson, 401 B.R. 378 (Bankr. D. Minn. 2009). Lacey, M. (2011, October 18).
Countless grievances, one thread: We’re angry. New York Times, p. A1. Lewin, T. (2010, August 14). Loan Repayment Rates Lag at For-Profit Colleges, Government Data Shows New York Times, p. A13. National Bankruptcy Review Commission (1997).
Bankruptcy: The next twenty years. Washington, DC: Author. Pardo R. I. & Lacey, M. R. (2009).
The Real Student-Loan Scandal: Undue Hardship Litigation American Bankruptcy Law Journal, 83, 171-235. Samand, J. (2011, October 26).
Obama’s student-loan plan scores political points but offers limited relief. Chronicle of Higher Education Online. Available at: http://chronicle.com/article/Obamas-Loan-Plan-Scores/129551/
Student loan debt surpasses credit cards (2010, August 9). Wall Street Journal (WSJ Blog). Available at: http://blogs.wsj.com/economics/2010/08/09/student-loan-debt-surpasses-credit-cards/.v