Reporter Tim Grant covered student loans in yesterday's Sunday edition of the Pittsburgh Post-Gazette. The time to start paying back student loans is drawing near for recent grads, but some aren't earning enough to pay them. Defaulting on these loans is a very, very bad thing. No, you won't go to debtor's prison, because of the astonishing Progress humankind has made over the centuries. Grant explained the rules—
Student loans are unlike other forms of debt such as credit cards, installment loans, auto loans and mortgages. Congress passed a law in 2005 that makes it nearly impossible to discharge federal or private student loan debt in bankruptcy.
Borrowers are financially stuck with those payments for life.
Defaulting on student loans also leads to harsher penalties than would be imposed for almost all other forms of debt.
While defaulted loans normally stay on a person's credit report for seven years, defaulted student loans stay on credit reports for seven years from the date the defaulted loan is paid off — which could mean it never goes away.
Also, unlike other debt, unpaid student loans could lead to wage garnishment, seizure of tax returns, seizure of Social Security benefits and loss of eligibility for federal Veterans Affairs or federal housing loan programs.
The law Grant is referring to is the felicitously named The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This Orwellian title is far more palatable than other more accurate renderings might have been, for example the Don't Default On Your Student Loan Or We'll Fuck You Up The Ass Act. Back in 2007, before the shit hit the fan, National Public Radio did a story on this 2005 law (audio). Here's the story intro.
There is another more recent federal law that adds to the attractiveness of this seemingly risky business of lending money to young adults whose prospect for disposable income might not easily match the rising cost of higher education plus interest. Two years ago, a rewrite of the federal bankruptcy rules took effect under a law with a pleasant-sounding title: The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
That law gave new status to student loans made by non-government, for-profit lenders. A borrower who declared bankruptcy could not get out of paying a loan like that.
Stephen Burd, who's now with the New America Foundation, covered this issue for The Chronicle of Higher Education. Welcome to the program.
And now the interview.
Mr. STEPHEN BURD — Thanks for having me.
SIEGEL — And I gather, this change didn't just happen in the bankruptcy law. There was a lot of lobbying that went into it.
Mr. BURD — The student loan industry lobbied hard to put this exemption into the bill. For example, between 1999 and 2005 - the years in which the bill was under consideration - Sally Mae, the nation's largest student loan provider spent $9 million lobbying Congress.
In addition, during that period of time, Sally Mae's PAC provided more than $130,000 in campaign contributions to members of the House and Senate Judiciary Committee, the key panels in charge of legislation.
SIEGEL — And their agenda was essentially to make this kind of student loan a non-dischargeable debt, as they say in…
Mr. BURD — Right, to make sure that private loans could not be discharged through the bankruptcy laws.
SIEGEL — Now, before 2005, there were federal loans that did enjoy that kind of protection from the bankruptcy laws. So this was extending a protection that existed?
Mr. BURD: Yes, that's correct. Since 1998, students haven't been able to discharge their federal loans through bankruptcy, lawmakers have been tightening it up these restrictions since the 1970s, when there were reports of deadbeat borrowers who are taking out student loans without having any intension of repaying them. So there has been this restriction on federal loans. The loan industry, I believe, argued that all educational loans should have the same restrictions on them.
SIEGEL — The story though of students who would take out student loans with no intention of repaying them and declare bankruptcy where relatively early in their adult lives they didn't have many assets at stake. I haven't found any actual data describing how common this was.
Mr. BURD — No, there isn't [any] data. A lot of these restrictions have been put on because of anecdotal information...
...with the private loan program, this isn't the case. And it's almost as if the government has given a blank check to the lenders to say, you know, charge whatever interest rates you want and we'll make sure that borrowers will have to repay you. So there's a lot more - I think there's a lot more anger and frustration about the fact that students can't get their private loans discharged. The government doesn't have a stake in it.
Well! I think this story speaks for itself. Let's fast-forward to 2011. Quoting Post-Gazette reporter Tim Grant again—
With the average debt for all four-year college graduates this year at $27,200, according to the nonprofit organization Project on Student Debt, and graduates facing what economists describe as the worst job market since the Great Depression, there is a higher likelihood many of them have not found work or are not earning enough to repay their loans.
It's no wonder the college loan default rate is on the rise.
This year's student loan default rate stands at 8.8 percent, compared to 7 percent last year, according to Mark Kantrowitz, publisher of financial aid websites finaid.org and fastweb.com. That translates to about 320,000 borrowers owing $2.4 billion who have made no payments on their student loans since last September.
And yet today, the majority of Americans can not understand why young people are occupying Wall Street and other city centers. Those in service to the financial elites ridicule the protesters, or compare them to Nazis. I hope you're keeping score, because now is an excellent time to separate the wheat from the chaff, the lap dogs from the quality human beings. Now is an excellent time to see the Empire for what it truly is.
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Student loans are particularly insidious for a few reasons outside of even being undischargeable:
a) They are offered to young people with the least experience to understand the implications
b) They are based on need rather than ability to pay (sounds like a good idea), which makes them very easy to get
c) Which means that colleges can raise their tuition without students freaking out because they can still get loans
d) Which means young adults out of school pay the money back into the financial system instead of into the larger economy
So yeah, the fact that you can't get rid of them even if you go bankrupt is just one of their many bad traits. But they are part of the system - colleges would have to drastically reduce their tuition if student loans didn't exist. Kinda like mortgages and housing! Funny how this works... And we all know what happened to housing prices.
Posted by: Adam | 10/10/2011 at 11:52 AM