As of May 2021, approximately 45 million Americans owe more than $1.7 trillion in student loan debt.1 For the arithmetically challenged, that means the average borrower has $38,000 in student loan debt. Further using the power of averages, that means for each borrower with $10,000 in student loan debt (still a lot!), there is someone with $66,000 in student loan debt (ug). And what we have read, and know from friends, colleagues, and family, show us that student loan debt exceeding $100,000, or double that, is increasingly common.
While politicians have bandied about various amounts of student loan forgiveness, little has come of it. As a result, last month a bipartisan group of legislators introduced the FRESH START Through Bankruptcy Act (S. 2598) ("Fresh Start Act").
Presently, debtors may only discharge student loans through bankruptcy by satisfying the strenuous - and some say, virtually insurmountable - burden of proving that the student loan payments are an "undue hardship."
Alternatively, if passed, the Fresh Start Act proposes to:
- Make federal student loans eligible for discharge 10 years after the first loan payment becomes due, through a cost-sharing structure (more on that below); and
- Retain the existing "undue hardship" option for private student loans or federal student loans due and owing for less than 10 years.
With respect to the cost-sharing structure, institutions of higher education ("IHE") that receive a certain amount of federally-backed student loans, would be required to repay a portion of the discharged federal student loans to the taxpayer, if the IHE had consistently high student loan defaults and low repayment rates at the time of the relevant student's attendance.
At first blush, this has a certain appeal - if the graduates of a school (or "IHE") disproportionately default on their debts or repay only low amounts, then shouldn't the school be, in part, at fault? Put another way, this creates better incentives (and penalties) for schools - do better to prepare your students for success, or face some financial risk. Spend more on student education, skills, and preparedness, and less on amenities, overhead, administrators, advertising, and the like.
On the other hand, this is simplistic. In application, this provision would likely see IHE's admitting fewer students who must borrow to attend, given the new founded risk of repayment. Indeed, the United Negro College Fund ("UNCF") has come out strongly against the bill, arguing that it will have a prejudicial effect on colleges that historically serve people of color and populations from underserved communities.2 It is very easy to blame a college for a student's lack of success; but success (or the lack thereof) is the result of a variety of factors, not just the adequacy of the college's education.
We here at the BCLP GRID (Global Restructuring and Insolvency Developments) will keep an eye on this, and we welcome and admire any effort to tackle student debt, if holistic in nature. There has to be a way to ensure:
- adequate funding for students to attend college,
- prevent student debt from crushing future hopes and dreams, and
- avoid instant discharge of the short term obligations arising from a life-long asset (education).
But those efforts must also:
- note and take into account the soaring costs of college,
- ensure that prospective students really understand all costs of college, and cheaper collegiate alternatives available to them,
- not create a race to the bottom by colleges that minimize loans and opportunities to poor and underserved communities, and
- recognize that a college degree does not automatically equalize everyone, or eliminate societal barriers to success.
This bill is a start; maybe it is just a flash in the pan, as we have seen that with a lot of bankruptcy issues over the years - we'll monitor and report back.
1 Federal Reserve Consumer Credit Report - May 2021, Federal Reserve Board, http://www.federalreserve.gov/releases/g19/current.
2 See UNCF Opposes "The FRESH START Through Bankruptcy Act of 2021", UNCF, https://uncf.org/news/uncf-opposes-the-fresh-start-through-bankruptcy-act-of-2021.
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