Bankruptcy Relief for Overburdened Student-Loan Debtors: The Democrats Could Be Heroes

The Democrats are in a funk. Donald Trump beat Kamala Harris handily last November despite being outspent 2 to 1. Then Trump affirmed all his cabinet nominations, even RFK Jr., which was a miracle. And finally, the President got the Big, Beautiful Bill through Congress by his arbitrary deadline--July 4th.

Democrats have responded to their reversal of fortune by returning to their three standard tactics: First, they've filed hundreds of lawsuits against the Trump administration before friendly judges. Second, some elected Democratic politicians have contrived to get restrained or arrested for impeding Trump's deportation actions--great photo ops! 

 Finally, several Democratic politicians have unleashed a torrent of profanity. In fact, Congresswoman Jasmine Crockett's status as the queen of gutter language is being challenged by several of her colleagues.

None of these tactics has increased the standing of the Democratic Party with American voters. Why not do something constructive?

I propose that Democrats engage with Republicans in a bipartisan effort to give bankruptcy relief to overburdened student-loan debtors. Our elected politicians need to acknowledge that the federal student loan program is an epic disaster that can't be fixed by income-based repayment plans or economic hardship deferrals. 

Distressed student borrowers need to be able to discharge their loans in bankruptcy like any other consumer debt. Currently, they are barred from relief by the "undue hardship" language in the Bankruptcy Code.

Not right away, of course. No one should obtain a lucrative undergraduate or professional degree and file for bankruptcy the next day.

No, every student-loan debtor should strive to pay off their college loans within ten years. Borrowers who are insolvent at the end of that period should be able to shed their debt in a federal bankruptcy court. And the same relief should be available to parents who took out Parent PLUS loans.

In other words, no more economic hardship deferments or income-based repayment plans. Instead, all student borrowers will be expected to pay off their college debt by the end of a decade. Those who fail to do so can walk over to the bankruptcy court and get relief.

Why hasn't Congress enacted this simple reform to the Bankruptcy Code? The explanation is simple.

Our elected politicians see the higher education industry as their most important constituency--not the millions of college students forced to take out burdensome loans to pay their outrageous tuition bills.

The colleges are okay with the status quo. They get juiced with federal student loan money year after year, regardless of whether their graduates can pay off the debt. 

If beaten-down student borrowers had access to the bankruptcy courts, millions would file for relief. Then, Americans would see just how much a college education is overpriced and how worthless those cheesy liberal arts and humanities degrees really are.

And, if the Democrats took the lead in getting bankruptcy relief for college borrowers, they would be heroes, instead of a bunch of bums, which is how they're perceived now.

The Parent PLUS Student Loan Program Preys on Low-Income Families and Should Be Shut Down

When Congress finally passes the Big Beautiful Bill (BBB), it will include some changes to the Parent PLUS student loan program.  The Senate version and the House version both put a cap on the amount of money parents can borrow for their children's college education through Parent PLUS.

Currently, students' parents can borrow all the money they need to pay for their children's college education through Parent PLUS loans. The House-approved version of the BBB limits the amount parents can borrow to $50,000 total. The Senate caps the amount at $65,000 per dependent.

Three years ago, I argued in a blog essay that the Parent PLUS program is a predatory scheme that saddles low-income families with unmanageable debt. I'm reposting that essay below.

* * * 

 Years ago, I was strolling along a lakeside hiking trail in a Dallas-area park. As I was walking across a wooden bridge, I looked down to see a ball of wriggling snakes below me.

It was a big cluster--about the size of a beachball. It was a scary sight, and I didn't stick around long enough to determine whether the snakes were poisonous. I just hurried on my way.

The Department of Education's Parent PLUS program is like a big ball of snakes. The program has become so predatory, so large, and so politically charged that we don't want to even try to untangle it.  We just want to hurry along without thinking about it.

Parent PLUS is a federal program that lends money to parents to help them pay for their children's education. Although Congress supposedly intended the program to help affluent families, six out of ten parent borrowers are from low-income households.  And, as Matt Krupnick reported for Newsweek, at 140 schools, 80 percent of parent borrowers are in low-income homes.

Parent PLUS default rates are high. According to a Newsweek analysis, nearly ten percent of parents at 1000 colleges defaulted or were seriously late with payments within just two years of their child left college. At some schools, Parent PLUS default rates ran as high as 30 and even 40 percent.

And borrowing costs are high: "6.28 percent for the 2021-2022 academic year plus an upfront fee of 4.22 percent" (as reported by Newsweek).

In 2019-2020, parents took out Parent PLUS loans on behalf of three-quarters of a million students, and the loan amounts averaged about $16,000. 

But the average Parent PLUS loan at some colleges is much larger. At Spelman College, an HBCU in Atlanta, the median Parent PLUS loan was $85,000 for parents whose children graduated or left school between 2017 and 2019.

Other schools with high Parent PLUS loan amounts include New York University (almost $67,000) and Loyola Marymount in Los Angeles ($60,000). The median loan amount is also high at several art and music schools: Berklee College of Music in Boston, Pratt Institute in Brooklyn, and Savannah College of Art and Design in Georgia.

Newsweek, the Wall Street Journal, and other news media have shown that some colleges are taking advantage of their students' parents by encouraging them to take out loans in addition to the federal loans and Pell grants that students receive on their own.

This is predatory behavior. And parents who take out Parent PLUS loans will find it is almost impossible to discharge these loans in bankruptcy.

Congress needs to shut down the Parent PLUS program. Or at the very least, Congress should amend the Bankruptcy Code to allow financially distressed parents to discharge these loans in bankruptcy.

But Congress will probably take no action. It sees the Parent PLUS program as a big ball of snakes, and no politician has the guts to close down this pernicious scam against low-income parents.