On October 1, 2015, the U.S. Department of Education issued a report entitled Strengthening the Student Loan System to Better Protect All Borrowers
. It's about time. More than 20 million people are struggling with unmanageable student loans, including 10 million who are delinquent on their loans or in default.
But what a pathetic document! Clearly President Obama and Secretary of Education Arne Duncan don't have the moral courage to seriously address the student-loan crisis. They are just tinkering with this problem, hoping they can keep the student-loan crisis off the public's radar screen until after Obama leaves office.
Here are my specific critiques:
Garnishing Social Security checks of elderly student-loan defaulters
. The federal government garnished the Social Security checks of a 155,000 student-loan defaulters in a recent year, which is shameful. It is true that the U.S. Supreme Court approved this practice in its heartless Lockhart
decision; but President Obama, using his discretionary enforcement powers that he so often invokes, could stop garnishing Social Security checks immediately. But he hasn't done that because he really doesn't give a damn about the suffering of elderly people.
Instead, the Department of Education recently proposed to insert an inflationary index into the garnishing system that would allow Social Security recipients to protect more of their Social Security check from garnishment when inflation occurs. (Currently, only $750 a month is protected from garnishment.)
This is an incredibly callous proposal. In the Roth
case, the 9th Circuit BAP court's 2013 decision, Jane Roth sought to discharge more than $90,000 in student-loan debt. At the time she filed for bankruptcy, she was 68 years old, had chronic health problems, and was entirely dependent on her Social Security check of less than $800 a month.
How could any humane and reasonable person argue that any
of Ms. Roth's Social Security check should be garnished? But that is what the Department of Education's recent report basically proposes.
Arbitration clauses imposed on unsophisticated student-loan borrowers by for-profit colleges
. The New York Times
reported recently that many private businesses (particularly those in the finance industry) require individuals to agree to arbitration clauses and to waive their right to sue. As the Times
pointed out, the arbitration system favors the business community over private individuals.
Many for-profit colleges also require students to arbitrate their grievances and to give up their right to sue, even if they believe their college defrauded them or breached contractual obligations. Arbitration can be more costly for individuals than litigation because arbitration fees can be quite expensive. And a business party is more likely to win than an individual. For-profit arbitration clauses have been upheld by the courts.
Why don't Arne Duncan and Barack Obama stop the for-profit college industry from inserting litigation waivers and arbitration clauses into their admission documents, which they could do simply by enacting a regulation prohibiting the for-profits from engaging in this pernicious practice?
I'll tell you why. Because for all their public hand-wring and their tongue-clucking over the student-loan crisis, Obama and Duncan are firmly committed to the status quo. Obama and Duncan's failure to address unconscionable arbitration clauses is shameful.
Making private loans dischargeable in bankruptcy
. The DOE report recommends "potential changes" to the treatment of private loans in the bankruptcy courts. DOE is referring to a provision in the Bankruptcy Code that Congress legislated in 2005 that makes private student loans nondischargeable in bankruptcy unless the debtor can show "undue hardship." Senator Joe Biden
, acting at the behest of the banking industry, helped get that legislation passed. Thanks,Joe!
Several prominent bankruptcy scholars have recommended that the 2005 legislation be repealed and that private student loans be dischargeable in bankruptcy like any other nonsecured debt. But the DOE doesn't go that far. Here's what the DOE report says:
[T]he report recommends allowing private loans that do not offer [pay-as-you-earn or PAYE]-like borrower protections to be dischargeable in bankruptcy similar to other forms of consumer debt. Allowing private lenders the protection of non-dischargeability if they offer PAYE-like features will provide an incentive for private lenders to create meaningful ex ante payment modification options available for when borrowers cannot make standard payments. (p. 17)
In other words, Obama and Duncan propose that banks will still have the protection of having their student loans virtually impossible to discharge in bankruptcy if they will allow distressed student-loan borrowers to switch from standard loan payments to long-term income-based repayment plans. Of course, the banks might be willing to add an income-based repayment feature to their student loans, but that would mean that most private student loans would negatively amortize due to the fact that the income-based payments would almost certainly not be large enough to pay accumulating interest.
What an idiotic notion! What the DOE report should have said is simply this: private student loans should be dischargeable in bankruptcy like any other unsecured loan--period.
The fact the the Department of Education advocates any
restrictions on bankruptcy relief for distressed debtors who took out private student loans is outrageous and shows that the Obama administration--for all its posturing--is little more than a lackey of the banks.
A few timid but good recommendations
. The DOE report does contain a few timid but good recommendations Eliminating tax liability for people whose student loans are forgiven under long-term income-based repayment plans is a good idea and one that President Obama had earlier proposed.
But student-loan borrowers were never under much of a threat of being assessed a huge tax bill if their loans were discharged. Present IRS regulations
do not consider a forgiven loan to be taxable income if the debtor is insolvent at the time the loan is forgiven. And in any event, this relief is small consolation for people who wind up in 25-year income-based repayment plans.
Streamlining the disability discharge process, which DOE recommends, is also a good idea. But if it is such a good idea, why did DOE oppose bankruptcy discharge for Bradley Myhre, a quadriplegic student-loan debtor whose expenses exceeded his income due to the fact that he needed a personal full-time caregiver in order to remain employed? (Myhre v. U.S. Department of Education
Finally, DOE promises to streamline the process whereby individuals can have their student loans forgiven if they were defrauded by the institution they attended. The DOE report states that the Department of Education "will conduct negotiated rulemaking on borrower defense and plans to develop new regulations to clarify and streamline loan forgiveness under the defense repayment provision . . . ."
What DOE probably means is that it will negotiate with the for-profit college industry regarding the process for forgiving loans owed by students who were enticed to enroll at for-profit collegea through fraud or misrepresentation. Of course it is a good idea to streamline the loan-forgiveness process for people who attended institutions that have been found guilty of misrepresenting their education programs.
But I doubt if DOE is willing to streamline the loan-forgiveness process enough to provide meaningful relief. After all there are 350,000 former students of the Corinthian Colleges system, which filed for bankruptcy last spring amid allegations of wrongdoing. As of a few months ago, only about 3,000 students
had had their student loans forgiven by DOE.
In my opinion, President Obama's Department of Education issued a report that purports to "strengthen" the student loan system for the protection of borrowers but does not attack the underlying problems. Until the private loan industry and the for-profit college industry are shut down and distressed student-loan debtors have meaningful access to the bankruptcy courts, the student-loan catastrophe will just grow bigger. And the number of people who can't make their student-loan payments--now more than 20 million--will only grow larger with each passing day.
|Frankly, my dear, we don't give a damn.|
Sirota, David. Joe Biden Backed Bills to Make It Harder For Americans To Reduce Their Student Debt. International Business Times, September 15 , 2015. Accessible: http://www.ibtimes.com/joe-biden-backed-bills-make-it-harder-americans-reduce-their-student-debt-2094664
U.S. Department of Education. Strengthening the Student Loan System to Better Protect All Borrowers. Washington, D.C., October 1, 2015: Author. Accessible: http://www2.ed.gov/documents/press-releases/strengthening-student-loan-system.pdf