One in Six

In 2005, Congress passed a revision of the U.S. bankruptcy laws to make them exceptionally difficult to use to avoid repaying student loans. While scoundrel corporations perpetrating extremely toxic business practices – short of out-and-out fraud – can soar like an eagle away from their financial obligations through the bankruptcy statutes, students unable to find work in a toxic economy caused by such toxic corporate chicanery and unable to pay back those loans have to dodge and weave through alternative structures to find relief.

Instead of a discharge in bankruptcy upon a showing of extreme financial hardship, folks who have defaulted on these student loans get an “income-based repayment plan,” that is not required of the above corporate miscreants. The test that would allow full discharge is a three year analysis to see whether or not you seem to be mired in a level of permanent poverty. A legal system with two separate sets of rules, one for students and another for everybody else. Separate but very unequal.

But even this purported safety value income-based plan seems to have missed the mark. A maze of forms and compliance procedures has flummoxed too many delinquent payors. “Under the program, borrowers pay 15 percent of their discretionary income for up to 25 years, after which the rest of their loan is forgiven. But participation has lagged because borrowers are either not aware of the program or are turned off by its complexity.”New York Times, September 8^th.

But bad job numbers, particularly for those seeking entry-level employment (read: recent graduates with big student loans, and even those who dropped out because college is too expensive even with the loans), are most certainly not a sufficient excuse for discharge. “As the number of people taking out government-backed student loans has exploded, so has the number who have fallen at least 12 months behind in making payments — about 5.9 million people nationwide, up about a third in the last five years. 

“In all, nearly one in every six borrowers with a loan balance is in default. The amount of defaulted loans — $76 billion — is greater than the yearly tuition bill for all students at public two- and four-year colleges and universities, according to a survey of state education officials… To get the money back, the Department of Education last fiscal year paid more than $1.4 billion to collection agencies and other groups to hunt down defaulters.” NY Times. And the government with its collection agents are really, really good at tracking the defaulters down. Default can result in a decimated credit score and a massive fine of up to 25% of the balance of the unpaid loan.

We seem to have inadvertently create a boom economy and a few new jobs in one inglorious sector, however: “With an outstanding balance of more than $1 trillion, student loans have become a silver lining for the debt collection industry at a time when its once-thriving business of credit card collection has diminished and the unemployment rate has made collection a challenge. To recoup unpaid loans, the federal government, private lenders and others have turned to collection agencies… Mark Russell, a mergers and acquisition specialist…suggested student loans might be a ‘new oil well’ for the accounts receivable management industry, or ARM, as the industry is known.” NY Times.

The issue here isn’t whether laws that favor those seeking to discharge their debts are good, fair, necessary or not. The big question is whether once you have such laws on the books, is it morally supportable to discriminate against specific classes of people or entities and give some vastly more favorable exit options while crushing that segment of society that we really are expecting to provide this nation with its future growth?

I’m Peter Dekom, and sometimes we really do need a notion of “fair and balanced.”