Last month, New York Times columnist Ron Lieber wrote an interesting piece analyzing whom to blame when students wind up in over their heads in educational debt. This past weekend, he wrote a somewhat more optimistic article, raising the possibility that student loans might become more easy to discharge in bankruptcy.
The status quo in terms of educational debt and bankruptcy is all too familiar to many law students and lawyers:
If you run up big credit card bills buying a new home theater system and can’t pay it off after a few years, bankruptcy judges can get rid of the debt. They may even erase loans from a casino. But if you borrow money to get an education and can’t afford the loan payments after a few years of underemployment, that’s another matter entirely. It’s nearly impossible to get rid of the debt in bankruptcy court, even if it’s a private loan from for-profit lenders like Citibank or the student loan specialist Sallie Mae.
Gambling debts can be discharged in bankruptcy like any other debts, but educational debts are subject to a test that requires the borrower to establish “undue hardship” (very tough to do under existing law). And losing money in a casino is a heck of a lot more fun than three years of law school.
But could changes to this legal regime be on the way?
There are rumblings for reform, according to Lieber:
[E]ven Sallie Mae, tired of being a punching bag for consumer advocates and hoping to avoid changes that would hurt its business too severely, has agreed that the law needs alteration. Bills in the Senate and House of Representatives would make the rules for private loans less strict, now that Congress has finished the job of getting banks out of the business of originating federal student loans.
But there could be some undesirable consequences that could serve as obstacles to change. Lieber wonders: “At a time when voters are furious at their neighbors for getting themselves into mortgage trouble, do legislators really want to change the bankruptcy laws so that even more people can walk away from their debts?”
(Well, it might be politically popular if it would help enough people. Check out Elie’s case in favor of a student loan bailout.)
Of course, many lenders will oppose the legislation:
At the April hearing [on overhauling the law], John Hupalo, managing director for student loans at Samuel A. Ramirez and Company, made the most obvious case against any change. “With no assets to lose, an education in hand, why not discharge the loan without ever making a payment to the lender?” he said.
Once you set aside this questionable presumption of mendacity among the young, there are actually plenty of practical reasons why not. “People don’t like to go through bankruptcy,” said Representative Steve Cohen, Democrat of Tennessee, who introduced the House bill that would change the rules. “It’s not like going to get a milkshake.”
Milkshakes are delicious; bankruptcy is not. And there are other reasons not to file frivolously, including damage to your credit rating and the inability to file again for a number of years.
Lenders have raised other possible consequences they see as problematic. If student loans become more easy to get rid of in bankruptcy, then educational lending will dry up and/or take place on tougher terms (e.g., with more co-signers, like parents, or at higher interest rates).
But would this be such a bad thing? Maybe this “parade of horribles” is one that we want to march through our town. We’ve taken the last two paragraphs of Lieber’s piece and edited them for the law school context:
If law school loans cost more and lenders underwrite fewer of them, people will have less money to spend on their legal educations. Some fly-by-night profit-making schools and some bottom-tier law schools might cease to exist, and all but the most popular private law schools might finally be forced to reckon with their costs, course offerings, and whether they are providing their students with good value — and good jobs — for their money.
Law school tuition might come down. And young lawyers just getting started in their careers might be less likely to face a nasty choice between decades of oppressive debt payments and visiting a bankruptcy judge before
getting deferred fromstarting an entry-level job.
So, readers, any thoughts? Are you in favor of making student loans easier to discharge in bankruptcy? And what do you think are the chances of this actually happening?
Earlier: Prior ATL coverage of student loans