Student loans have a number of big problems that Congress is trying to address with new legislation.
First, the obligation is for life – it is the only consumer debt that is not dischargeable in bankruptcy.
Second, the repayment options are confusing and there are no incentives for employers to participate by providing a benefit – limiting borrower options to earning more during a period of wage and earnings stagnation.
Third, debt forgiveness programs (i.e. Public Loan Forgiveness
) have not been honored in more than 99% of cases and also come with unrealistic time horizons of 10-years that are too long to be meaningful for most in the current career environment.
Several new proposals have been presented to solve the problem.
Making Student Loans Dischargeable in Bankruptcy
Perhaps the most exciting new development is the “Student Borrower Bankruptcy Relief Act of 2019.”
The Act would eliminate the section of the bankruptcy code that makes private and federal student loans nondischargeable, allowing these loans to be treated like nearly all other forms of consumer debt.
The American Bankruptcy Institute’s Commission on Consumer Bankruptcy
does not favor an unlimited discharge of all student loan debt being made available to all borrowers. See Pg. 1.
The Bankruptcy Bar instead recommends returning to the prior 7-year bar on discharge and exempting federal student loans (90% of the total
) from discharge. This is a much more restrictive and virtually toothless view on student loan debt relief than that proposed in the Student Borrower Bankruptcy Relief Act. The Bankruptcy Relief Act would do much more and would reverse the course of modern student loan discharge law, that offers relief to almost no one.
Under the three-part Brunner test
borrowers presently can only discharge student loans in bankruptcy for “undue hardship” which is a notoriously high bar that generally only applies if there is “no possibility” you could ever earn enough to discharge the loan (i.e., you are a paralyzed and bedridden and cannot work and have astronomically high medical bills to boot). Being underemployed or underpaid to the extent that it would take 60 or 70-years of full-time work 7-days a week at your normal hourly wage to pay down the student loan would not be enough to qualify.
Making student loans dischargeable would make it so those with astronomical loans would not be subject to a life sentence and would provide other borrowers some modicum of leverage to negotiate fair workouts. However, the fact that most loans are handled by the federal government still means that the prospects for meaningful negotiation would be limited.
Allowing Employers’ to Pay Down $5,250 of Student Loan Debt Tax-Free
U.S. Sens. John Thune (R-S.D.) and Mark Warner (D-Va.) recently introduced legislation to help Americans tackle their student loan debt. The “Employer Participation in Repayment Act”
would allow employers to contribute up to $5,250 tax-free to their employees’ student loans.
The Employer Education Assistance Program, as currently written, only provides assistance for workers who are seeking additional education. It does not extend to individuals who have already incurred student loan debt during their undergraduate or graduate studies.
While the employer-sponsorship model is promising, in conjunction with other reforms, I do not think it is wise to limit the benefit to only $5,250 of student loan payments, considering that for borrowers with larger debt loads (doctors, lawyers, engineers & scientists) this would limit the meaningfulness of the benefit for professional employers.
Revamping the Failed Public Service Loan Forgiveness Program
More recently, in view of the upcoming presidential election cycle, U.S. Senators Kirsten Gillibrand (D-NY) and Tim Kaine (D-VA) introduced a new bill, which would rework the current Public Service Loan Forgiveness program, which Trump’s recommendation is to eliminate entirely.
The false promises and confusing provisions of the existing law have erupted into one of the worst education scandals in modern times.
"It’s clear that it’s not working and that public servants who thought they had a deal aren't getting the benefit of that deal," said Daniel Zibel, vice president of the National Student Legal Defense Network.
The program appears to be a scam. As of this writing, over 1,173,420 individuals have worked for 10-years in public service and applied for forgiveness. 55 of them received student loan forgiveness. The rest were denied for “not meeting plan requirements.”
Pundits suggest that the government will continue to deny virtually all applicants on various technical grounds. The program is a farce given that only 5 out of every 100,000 eligible public servants who completes the 10-year program and applies actually receives forgiveness.
The reality is that government subsidies are not free and our government is bankrupt, so no ordinary citizen should place any confidence in the government honoring a commitment to government expenditure – just as people who are broke don’t pay non-vital bills, a bankrupt government will not give out handouts for benefits and entitlements it simply cannot afford.
Public Service Loan Forgiveness Statistics
As of September 30, 2018, here are the latest public service student loan debt statistics:
Public Service Loan Forgiveness cumulative borrowers: 890,516
Borrowers who submitted applications: 41,221
Total number of applications: 49,669
Number of applications approved: 423
Number of applications denied: 32,409
Number of applications denied due to missing information: 11,892
Borrowers who have received student loan forgiveness: 206
Total dollar amount forgiven: $12.3 million
(Source: U.S. Department of Education)
The Act would make all loans eligible, and not just “Direct loans,” would apply to all payment plans (not just income-driven repayment), and would cut the 10-year schedule into two 5-year schedules, after each of which 50% of the outstanding debt would be forgiven.
The government subtext that eligible borrowers didn’t meet or prove that they met plan requirements and the rampant denials issued to over 99% of borrowers has largely been ignored by regulators, legislators and industry insiders. It has received minimal media coverage to boot.
The Scope of the Problem
The country’s outstanding student loan balance is projected to climb to over $2 trillion by 2022, far surpassing all other forms of consumer debt. Moreover, more than 25% of borrowers are in delinquency or default (not counting the majority of the remainder who are in forbearance or on payment plans that pay interest only). A large percentage of student loan debts will never be repaid.
Student loans now make up 10% of the country’s federal debt and growing. 45 million consumers are saddled with student loans, averaging $37,000 per person, and student loan debtors constitute the majority of the active workforce.
For most, student loans are handcuffs that equate to lifelong debt imprisonment. People with significant student loans live in a shadow economy. Those with significant student loan debt will not: (1) buy a home; (2) start a family; (3) have children; (4) save for retirement; (5) spend money on consumer goods; (5) take any vacations; (6) buy a car; and/or (7) invest. They will experience credit impacts greater than those with bankruptcies and foreclosures and be ineligible for most commercial loans to grow a businesses or consumer financing to buy a home or engage in other normal economic activity.
In a study released in January 2019, the Federal Reserve Bank of New York found that homeownership rates for people ages 24 to 32 decreased by almost 9 percentage points.
20% of the increasing decline in homeownership rates is attributable solely to student loans. 400,000 consumers in the United States decided they could not afford to buy a home now or during their lifetime due to student loan debt. 80% of consumers surveyed by the National Association of Realtors (NAR) who were not looking into buying a home now or in the future stated that they were not considering ever buying a home due to student debt loads.
Benjamin Keys, a Wharton real estate professor with a specialty in household finance and debt described the situation millennials face – huge student loan debt loads and starting their careers during the Great Recession – as an insurmountable and unprecedented economic burden. “They are certainly starting off at a disadvantage relative to previous generations, and a lot of the scrutiny of millennials is really misplaced given the disadvantages they’ve had in terms of their costs of education and poor labor market upon entry.”
Student Loan Debt is Aging as It Follows Borrowers Into Retirement
Is student loan debt a life sentence? For most, it is. A 2014 U.S. General Accountability Office study of student debt for older Americans uncovered a surprising trend: Although it is presently a small number of 5%, an increasing percentage of Americans age 65 and older are carrying student debt, and that cohort is increasing dramatically every year by a rate of 1%+ per year since 2015, so that today 5% of older Americans over age 65 have significant student loan debt they are still trying to pay off. By my estimates, by 2045, more than 60% of older Americans over age 65 will have student loan debt.
Considering most of the individuals who are 65 today went to school in the 60’s and 70’s, when those who went to school in the 80’s, 90’s and 00’s start entering “retirement age” it is probable that older Americans will increasingly be allocating large portions of their after-tax income to continuing federal student loan debt and defaults. How will they earn enough to do this and to ever retire or cover expenses as their income declines?
The one hope for saving the system, an increasing birth rate, has been snuffed out due to the student loan crisis. According to the CDC, the U.S. birthrate is in a historic and unprecedented slump and fell to a 32-year low in 2018, with the overall population in a pattern of continuing year-over-year decrease.
The structural problem presented by the low birthrate – an aging population without young workers to support them – is the greatest threat facing the United States today. The social safety net and all public programs depend on there being a far greater number of active young workers than those receiving benefits, and the greying of America when combined with a shrinking youth work population threatens structural insolvency and sets the stage for some form of contentious generational political conflict.
"The birthrate is a barometer of despair," Dowell Myers, a demographer at the University of Southern California, said in response to the CDC data. Explaining that idea, he says “young people won't make plans to have babies unless they're optimistic about the future.” There isn’t much to be optimistic about and the fertility rate reflects that.
The total fertility rate is 1.72. That is, that for every 2 parents, there are 1.72 children being born to them. Thus, every year the population will decrease until the birth rate rises back above a rate of 2.00 – the rate at which new births exactly equal the number of people in the present population.
We have had a deficit replacement level for 10-years since the Great Recession. Due to deaths of a portion of the population prior to reaching child-bearing age, the report actually calculated the true replacement rate at 2,100 births per 1,000 women, or a rate of 2.10. We have fallen 19% below that level.
If you take the birth rate as the only true barometer of the optimism of the American public, the country is currently at the lowest point in U.S. history. The birth rate peaked at about 3.5 in the ‘50s and ‘60s, but since 2000 has steadily fallen to all-time lows that have never existed since the country’s founding. If you think that 1.72 is just a blip, consider that the birth rate has almost never fallen below 3.0 throughout American history and has frequently approached or risen above 4.0, more than twice the current rate.
What is the impact of these demographic shifts? Defaulted student loans are eligible for the federal tax refund offset, and federal benefit offset – which allows the federal government to seize your social security and tax refund and apply it to your defaulted student loan debt. Thus, older Americans who increasingly have student loan debt they cannot pay in retirement, will forfeit social safety benefits, leaving them effectively unable to ever retire.
The Democratic Bankruptcy Debate
While democrats like Warren and Sanders spar over student loan bankruptcy reform, the historic rationale for limiting bankruptcy relief for student loans has faded significantly.
The economic toll as income, already taxed, goes to student loan payments rather than being used for consumer purchases of homes and cars and other commercial goods is a multiple of geometrically greater proportion than any theoretical drag on the economy due to student loan discharges of debts not being paid.
Considering about 25% of all federally-backed loans aren’t being paid, 25% are in some form of forebearance, and most of the remainder are in “income-driven repayment” plans that generally do not even cover the interest payment – we are handicapping a generation from making purchases and receiving no commensurate benefit in terms of higher federal receipts to offset the federal debt – which can never be paid down anyway.
While economists have identified the reduction in marriages, purchases of homes, and having children, getting exact figures for these items is difficult. And the lack of clear causal connections – and a reliance on anecdotal data – makes it harder to justify the social benefits of meaningful reform.
“Unnecessary and abusive bankruptcy hurts everyone,” Biden said in March 2001 after helping to scuttle some liberal amendments that might have derailed the bill that made student loans non-dischargeable. “This costs every single American consumer.’’ And in that one moment, Biden and others who favored the absolute bar to bankruptcy discharge wiped out the economic fortunes of several generations of Americans -- sentencing them to lifelong indentured servitude to student loan debt that could never be repaid and thereby relegated these citizens to a status as "economic untouchables" who would never have credit or be able to meaningfully engage in the broader economy.
Unfortunately, Biden’s well-intentioned comments were 180 degrees off the mark. The existence of staggering student loan debt has hurt every single American consumer in the form of stagnant wages, higher prices, less demand, and a chilling of commerce. When consumers are allocating their income to debt repayment they cannot participate in activities that accelerate the economy, so the economy slows to a halt, with weakened demand creating a state of stagflation.
Biden, like many democrats, provides an olive branch by agreeing that private student loans should be dischargeable, but since this only makes up about 10% of the total student loan problem, it would have little effect.
It is a good sign that the issue is coming to the forefront, but in addition the band-aid solutions offered by the current proposals, much more is needed to address this enormous problem facing the American public.
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If you have questions or need help with dealing with student loan debt, please call (201) 529-8024 or e-mail me at [email protected]