In the 13 years that I have been working on the student loan problem, I have personally yet to find even one instance where a college president has decried or even acknowledged the fact that bankruptcy protections, allowed in virtually all other instances, have been stripped distinctly from student loans. A decade ago, I engaged in a conversation with one president who, to my astonishment, was not even aware that this protection had been removed from student loans. After I informed him of that fact, he expressed genuine surprise. I suppose that was understandable 10 years ago. Today, however, such claims of ignorance would be hard to believe.
Conservatives like New York Times columnist David Brooks and Ike Brannon of the Cato Institute have publicly called for the return of bankruptcy to student loans. Jeb Bush actually included this in his presidential agenda. Similarly, liberals like Robert Reich, Thom Hartmann and many others have made this call, and the Democratic Party made the return of bankruptcy a plank in their party platform in Philadelphia last year. Even Joe Rogan, a mixed martial arts celebrity -- and the last person I would expect to know anything about student loans -- has weighed in on this topic.
But not even one public comment from a college president on this? The silence is deafening!
Founding Fathers George Washington and Thomas Jefferson were in colossal debt to British banks and merchants. They learned the hard way how a lending system could be used against the citizens. John Adams famously remarked, “There are two ways to enslave and conquer a nation. One is by the sword. The other is by debt.”
Those men made it a point to require bankruptcy rights ahead of the power to raise an army and even to declare war in Article I, Section 8. Even Adam Smith -- the founder of Western economic theory -- acknowledged bankruptcy as an inevitable phenomenon in a risk-taking economy, and the institute that today bears his name advocates strongly for bankruptcy rights as a means to encourage entrepreneurship as well as to compel good faith in a lending relationship. The student loan exception has proven the wisdom of these men in spades.
The lending system has become obscenely predatory and profitable for the banks who lobbied away bankruptcy protections. Remember how the banks promised Congress in 2005 that removing bankruptcy rights from private student loans would enable them to make loans to more needy individuals? After the bankruptcy bill was passed, not only did they often not lend to needier students, they actually began demanding co-signers (with real assets to come after) for many of their new loans.
This predatory abuse of the citizenry has not been limited to the private sector, however. The federal government booked over $50 billion in profit from student loans in 2012 -- a number that has certainly increased since then. And my analysis of years of White House budget data show that the government has been making a profit, not a loss, on defaulted student loans. Meanwhile, the U.S. Department of Education and its lawyers fight behind the scenes to keep bankruptcy gone.
Since bankruptcy was made permanently unavailable for the overwhelming majority of borrowers in 1998, the nation’s student loan debt has gone from $100 billion to an astonishing $1.4 trillion today. Interest alone on this amount is about $90 billion annually.
Even bankers like Jamie Dimon, president and CEO of J. P. Morgan Chase, and William C. Dudley, president of the Federal Reserve Bank of New York, have begun to warn of the effect that student loan debt is having on the economy.
People’s lives are being devastated. Families are being torn apart, especially when the lenders come after parents and grandparents to collect on exploded loans. Some people are even committing suicide as a result of their student loan debt. These people all trusted that their colleges -- and their college’s president -- had their best interests in mind.
The forgiveness programs that many presidents point to instead of even discussing bankruptcy are failing miserably. The federal government apparently has no desire or intention of forgiving loans, as evidenced by the fact that as of 2015, a whopping 57 percent had been disqualified from the income-based repayment for failure to verify their income -- an annual, onerous process that the Education Department could easily do on its own through the IRS but chooses not to. This is only one of many grounds (others include defaulting or decertification of the nonprofit status of one’s employer) by which one can lose out on loan forgiveness.
Assuming the programs aren’t ended, my best estimate is that only around 10 percent of those who enroll in these forgiveness plans will make it through. The rest will be expelled from the program, and left owing far more than when they graduated. In October, the first loans were to be forgiven under the Public Service Loan Forgiveness Program. I have heard varying estimates for the number of loans that have been forgiven to date, ranging from zero to fewer than 500, but suffice it to say that precious few people are making it through. Most are being rudely awakened to learn that their payments are not qualified for one reason or another.
My research indicates strongly that the lending system has crossed the threshold of stability. Last year, the number of defaulted borrowers skyrocketed to a reported total of about eight million people.
But that total is conservative: the Education Department has said that about 20 percent of defaulters rehabilitate their loans -- a hugely harmful process whereby the borrowers sign for a new, much larger loan and then default again about 80 percent of the time. So the true number of defaulters at the end of the year was likely closer to 9.6 million, and by the end of this year, we will likely be close to 11 million people, or a quarter of all borrowers. Moreover, my best estimate is that something like 27 million of the 44 million borrowers in the country are unable to make payments on their loans, or at least aren’t making a dent in them.
At a time when the credibility and legitimacy of this country’s institutions are under serious attack, college presidents should think very seriously about their silence on the bankruptcy issue. The citizens trust these men and women to look out for the best interests of our kids -- not look the other way.
There is bipartisan legislation in Congress right now, called HR 2366, that will return standard bankruptcy protections to student loans and restore basic fairness to the lending system. The cost of this legislation is estimated to be less than $3 billion per year -- a relative pittance compared to annual government lending profits. Supporting this legislation is the absolute least that college leaders could do if they wish to avoid the collapse of public confidence in their colleges and universities.