Drowning in Student Debt: Who Should You Thank?
Student loans are one of the few exceptions that cannot be discharged in bankruptcy in the Bankruptcy Abuse Prevention and Consumer Protection Act, which was passed by the Bush administration in 2005. Student loans fall under the same category as child support payments and criminal fines.
Almost any other kind of debt including medical bills, mortgage, credit cards and car loans, even gambling losses can be discharged under this law.
Critics of the law say it is a giant giveaway to the banking industry that provides protections for lenders as opposed to students. The average loan balance for U.S. college students has increased 55 percent since 2005 .
A little bit of a background history on the student loans:
The first student loans were provided by banks and private lenders with the U.S. Treasury guarantee, under the National Defense Education Act of 1958, following a recommendation of economist Milton Friedman (surprise, surprise). Resulting program was called the Federal Family Education Loan (FFEL) .
In 1993, newly elected President Clinton proposed replacing the guarantee program with the direct borrowing approach, as estimates from all of the government’s budgeting and auditing agencies showed that direct lending would deliver the same loans to the students at a significantly lower cost to the taxpayers .
Following President Clinton’s proposal, the Congress passed a budget reconciliation bill to replace up to 60% of the bank loans with direct government loans. However, by 1995, the new Republican leadership in the congress was already targeting direct lending. They successfully passed a law that prohibiting the Department of Education from requiring colleges to switch to the direct loan program .
Of course, it should not come as a surprise that since the student loans were transferred to banks instead of Government directly offering them, tuition costs have soared. In addition to rising tuition costs, the unregulated nature of the government guarantee of the student loans has created a slew of diploma mills throughout the United States.
However, when the credit markets crashed in 2008, the ability of many private lenders to make loans -even with the federal guarantee- declined dramatically, and many private lenders discontinued participation in the program. In response, numerous schools switched back to the direct loan program, and direct loan program volume began to increase in 2008.
In 2009, President Obama proposed eliminating the FFEL program to make all federal student loans direct Loans. Since July 2010, all new student loans have been made as direct federal loans, managed by the Department of Education, eliminating the subsidized middlemen. Estimates show that the Direct Loan Program would save taxpayers $47.5 billion over ten years .
Yet, the loans that were given to the students between 1995 and 2010 have created a huge burden on the young generations who are trying to start their working lives after college.
According to the Consumer Financial Protection Bureau, as of 2012 outstanding U.S. educational debt has reached $1 trillion surpassing the amount Americans owe on their credit cards. Currently, only an estimated 39 percent are paying down the balances. Approximately 5.4 million borrowers have at least one student loan account past due .
This of course begs the question; if the U.S. Government is guaranteeing the loans, why can’t the borrowers discharge it in a bankruptcy? At the end, if the borrower is unable to pay back his or her student loan, government picks up the bill. Why then, it still lingers on the person’s credit to prevent them from being able to buy a car, start a new business or even find a job, as many employers now check employee’s credit before hiring?
Eliminating the FFEL program seems to be the first positive step towards a meaningful student loan reform, next steps can be the revision of the bankruptcy law and lowering the cost of tuition.
Image credit: www.mint.com
1- Bloomberg: U.S. Student-Loan Balances Increase 55% Since 2005
2, 3, 4- New America Foundation: Federal Student Loan Programs – History
5- Military Hub Website: Obama Budget Proposal to Increase College Pell Grants and Eliminate FFELP Middleman
6- Bloomberg Businessweek Blog: Even after bankruptcy, trapped by student debt