September 23, 2017

Student Loans: What if I Refuse to Pay?

I recently consulted with a Ph.D. with a responsible job who will never be able to repay her loansMuch has been said lately about student loans, the high default rate involved with these loans, and the hardship, if not downright misery, that these loans can cause. 

Now a new movement is afoot by various groups to refuse to pay student loans.  Given what I perceive to be a growing storm of discontent regarding student loans, I feel that it is now the time for me to express my opinion.

To understand student loans, understand their history

First, I want to discuss the history of student loans in the context of the Federal Bankruptcy Code.  As an initial matter, I believe that virtually everyone believes that when you give your word, you should live up to your obligation. A contract—namely a loan contract to finance education—is giving your word to do something in the future.

But what happens when subsequent events make it impossible to live up to the terms of the contract?

With most contractual obligations; i.e. business, credit cards, medical debts, purchase contracts, and the like, the obligations can be discharged in a bankruptcy case. “Discharge” simply means that the debts cease to exist, and the debtor is given a fresh financial start (“fresh start”). 

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The reason for the fresh start concept is the idea that in a credit based society such as ours, you must give people who obtain credit a “safety valve” in order to encourage people to obtain credit. Think about the old days with debtors’ prisons. 

Ask yourself, would you be driving the car that you now drive and make payments on if the possibility existed that you would go to prison if you got sick and could not make the payments?  Thus the safety valve of a bankruptcy discharge assures  us that our lives will not be destroyed if we cannot make the car payment.

Why are student loans different than other types of debt?

School loans are different. Why? I am not sure that I know the reason; however, they have always been treated differently. Perhaps this is so because the underlying theory is that the education that the loan pays for will help generate greater income for the individual down the road.

Whatever the reason, school loans have been treated differently in bankruptcy law. Some years ago when student loans could be discharged in bankruptcy, the loan had to be outstanding for at least six years.  In addition, there was a distinction between government loans and private loans.

This six year period was raised to eight years. Then, in 2005, the ability to discharge student loans in bankruptcy was virtually done away with entirely. Was this because there is some inherent wrong in discharging school loans or was is, perhaps, because the lenders hand really good lobbyist whispering in Congress’ ear?   

How it stands today with bankruptcy and student loans

The state of the bankruptcy law is now that school loans of any type are non-dischargeable unless the debtor can show “undue hardship”.  It seems that the standard adopted by the courts is “abject impossibility”.  This means that a debtor must prove that it is impossible under any circumstances to make payments on the school.  This not only means now.  It also includes the future. 

Is it possible that a debtor will win the lottery eighteen years in the future, thus having the ability to pay the school loan? Of course it is, Therefore, as a practical matter, I advise my clients that if they have no arms, no legs, they can’t see, and they can’t hear, they have a fifty-fifty chance of discharging a school loan.       

Has the paradigm changed? Are things like they used to be?  Were things ever like they used to be?  I am not sure that I can answer those questions; but I certainly can make some observations. 

How we got here

First, the cost of education has gone sky high.  College or graduate school tuition can be $30,000 to $50,000 or more per year. 

Second, it seems to me that there has been a blank check as far as lenders are concerned with reference to lending for education. The question is how much do you want rather than what is the economic benefit of the loan.  This says nothing about generally higher than average interest rates that apply when the loan becomes due.  In addition, it is not unusual (probably it is the norm) for a college or university to push student loans.  Why not?  They get the tuition. If the student can’t repay the loan it is no skin off their noses. 

Now, add to the already nasty problem the fact that there are hundreds of for-profit colleges and universities.  They exist to make a profit.  This is done by maximizing enrollment.  More students mean more profit.  The fact that the student may very well not be able to repay the loans for the school is not important.

Finally, what I perceive as the “hard sell” that many educational institutions are using on their students is made only that much more offensive when I consider the nature of the student.  As a general matter, these are young people and for the most part not sophisticated in business matters. 

Lack of savvy regarding consumer debt

Think about borrowing $30,000. That would make me think long and hard. However, a young person may very well borrow this amount each year for four years to finance a college education.  They are told,
Don’t worry about it.  You will make plenty of money to pay it back.”  A college degree is the door opener to a well-above-average income.  This may have been true at some time in the past, but it is certainly not true now. This CNN video makes that point.

The graduate who gets the $40,000  a year loan brings home $2,600 a month and has a $500 a month school loan payment has definitely not hit the big time.  More likely, they have millstones around their necks that will likely burden them for the rest of their lives. 

Remember, that under certain circumstances school loan lenders have the ability to garnish wages, and this includes Social Security.  Not even old folks stand a chance when confronting school loan lenders.

Going into default on your student loan   

Now it is time for some really scary stuff that I picked up from the February 26, 2015, News and Analysis published by the American Bankruptcy Institute.  The Federal Reserve Bank of New York says that about one-quarter of the Americans with school loans that became due in the last 10 years have gone into default.  “Default” means that no payments have been made in at least 270 days. 

Defaulting on a student loan subjects the borrower to a penalty for collection fees that can add up to 25%  of the principal and interest to the debt.  Collection tactics include garnishing bank accounts, taking tax refunds, and garnishing wages.

Wait, there is more.  In some cases including the movement to refuse to pay school loans that I mentioned above, the student loans were for educational programs were virtually non-existent or downright fraudulent. Tough luck. Student, you did not borrow the money from the educational institution.  You borrowed it from a third party lender.  The third party lender did not defraud you. You are a grown man or woman, and you made a bad deal. You owe the money.  To reiterate, tough luck!

How bad can it get for graduates?

How bad can it get?  We were consulted a person in her mid-fifties.  She was an assistant school principal making about $50,000.  She had obtained a Ph.D. She had also obtained school loans for this education in the amount of approximately $250,000. 

She will go to her death owing far more than she ever borrowed. 

Admittedly, this is a gross example.  However, the sheer number of defaults indicates just how serious this problem is. How many people are going to be doomed to a life of virtual poverty by some educational snake oil salesman telling them that that all they need to do is get an education?

Is it possible that we can make it better?  Certainly, but that appears to be highly unlikely. Unfortunately, money talks and a great deal of money is being made from these school loans.  They are easy to make because the borrowers are generally unsophisticated in financial matters involving investment risk and reward.  They are highly collectible because they never go away.     

At the risk of sounding cynical, I can point to the guy who said that “The business of America is business,” and say that therefore, this is America at its best.