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Waiting for the Bubble to Burst

Waiting for the Bubble to Burst. Is Student Debt the Next Subprime Mortgage Crisis?. In 2005. The Bankruptcy Abuse Prevention and Consumer Protection Act (the Act) was signed into law, April 20, 2005. The explicit intent was to discourage bankruptcy filings under the US Bankruptcy Code.

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Waiting for the Bubble to Burst

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  1. Waiting for the Bubble to Burst Is Student Debt the Next Subprime Mortgage Crisis?

  2. In 2005.... • The Bankruptcy Abuse Prevention and Consumer Protection Act (the Act) was signed into law, April 20, 2005. • The explicit intent was to discourage bankruptcy filings under the US Bankruptcy Code. • “This legislation, masquerading as protection against bankruptcy abuse, is really a protection for credit card companies and their predatory lending practices. This legislation does not protect the American people. This legislation protects the credit industry at the expense of the American people.” Alcee Hastings (D. FL 20) House Debate on the Act. See 151 Cong. Rec. H1974-05

  3. Reasoning of the current law: • Federal legislators thought that bankruptcy no longer brought with it the stigma it once had • That it had become “an attractive alternative” to paying one’s debts. • After the 1984 Amendments, bankruptcy filings tripled. • Student Loans were not the target of the legislation, it was roped in with pages and pages of bankruptcy reform RoxaneDeLaurell and Robert Rouse, The Bankruptcy Reform Act of 2005: A New Landscape, The CPA Journal, Nov. 2006, accessed at http://www.nysscpa.org/cpajournal/2006/1106/essentials/p36.htm

  4. The Old Law: • (8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; 11 U.S.C.A. § 523 (a)(8)

  5. The Current Law: • 11 U.S.C. § 523 (a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-- • (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for— • (A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or • (ii)an obligation to repay funds received as en educational benefit, scholarship, or stipend; or • (B) any other educational loan that is a qualified education loan, as defined in 6221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

  6. Translation: • NO STUDENT LOANS, PUBLIC OR PRIVATE, CAN BE DISCHARGED BY FILING FOR BANKRUPTCY UNLESS YOU CAN SHOW “UNDUE HARDSHIP.” • Problem: courts have interpreted what constitutes “undue hardship” differently all over the country. • There are no less than three “tests” used: • Brunner • Johnson • Bryant • (as of now, all these cases have either been overruled, or declined to follow by various lower courts.)

  7. Meanwhile, student Loans surpassed Credit Cards as the largest source of unsecured consumer debt. • Over $1 trillion dollars • $150 billion belongs to 2.9 million students in debt to private lenders • The other 85% is held by the U.S. government. • JD Supra Law News: Andrews Law, PLC, posted Nov. 6, 2012 • http://www.jdsupra.com/legalnews/student-loan-bankruptcy-reform-08724/ • Only about 30% is incurred by students who drop out of school • Consumer Financial Protection Bureau and Department of Education, Report to Congress on Private Student Loans (July 2012). • Annual Report of the Consumer Financial Protection Bureau Student Loan Ombudsman. Oct. 16, 2012.

  8. Once a person defaults on a student loan, they are generally more at risk of defaulting again. • Any loans that are dispersed are taxable as income; therefore declaring bankruptcy is not a “get-out-of-jail-free” card. • Generally, being at the beginning of their careers, people with student loans are not eager to declare bankruptcy and ruin their credit, potential to own a house, etc. in the future. • The system that was enacted in 2005 also provides for payments as “penalties” to private loan holders if a person defaults. • In other words, the holders of these loans have no incentive to make repayment easier, to create jobs that would allow people to pay them off, or change the law at all, because they loose nothing and in fact gain when people can’t repay. • There is little to no risk for lenders regarding these student loans, because the—often young, inexperienced and vulnerable—debtors cannot discharge the loans.

  9. Current Bills attempting to change the law: • Senate Bill 114: Fairness for Struggling Students Act of 2013 • Status: currently in Senate Judiciary Committee • Govtrack.us gives it a 7% chance of surviving committee and a 1% chance of being enacted. • Reintroduction of the 2011, and 2010 versions, also sponsored by Senator Durbin, (IL. D) This bill is related to S.113 Know Before You Owe, Private Student Loan Act of 2013 to amend the Truth in Lending Act and the Higher Education Act of 1965 to require creditors to obtain certifications from institutions of higher education, and for other purposes.

  10. Changes Proposed: • 11 U.S.C. § 523 (a) (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for— • (A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; o • (ii)an obligation to repay funds received as en educational benefit, scholarship, or stipend; or • (B) any other educational loan that is a qualified education loan, as defined in 6221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual. • [Adding:] “dependents, for an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit or made under any program funded in whole or in part by a governmental unit, or an obligation to repay funds received from a governmental unit as an educational benefit.”

  11. House Bill 532: Private Student Loan Bankruptcy Fairness Act of 2013 • Sponsor: Steve Cohen (D-TN9) 24 co-sponsors • Introduced Feb. 6, 2013, referred to Committee • According to govtracker.us this bill has a 3% chance of making it out of Committee and a • 1% chance of enactment

  12. Changes Proposed: • 11 U.S.C. § 523 (a) (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for— • an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or any program for which substantially all of the funds are provided by a nonprofit institution; or • an obligation to repay funds received as en educational benefit, scholarship, or stipend; or • (B) any other educational loan that is a qualified education loan, as defined in 6221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

  13. Non-Profit Policy Paramours The Project on Student Debt Young Invincibles: Aaron Smith, Co-Founder and Executive Director. New America Foundation National Consumer Law Center Student Loan Justice.Org

  14. Governmental Allies: Senators Representatives Co-sponsors of HR 532 *Steven Cohen (D-TN9) Madeleine Bordallo D-GU0 Judy Chu D-CA27 John Conyers D-MI13 Joe Courtney D-CT2 Danny Davis D-IL7 Keith Ellison D-MN5 Rush Holt D-NJ12 Henry “Hank” Johnson D-GA4 Barbara Lee D-CA13 George Miller D-CA11 ChelliePingree D-ME1 Charges Rangel D-NY13 Henry Waxman D-CA33 • Co-sponsors of S.114 • *Richard Durbin D-IL • *Alan “Al” Franken D-MN • Thomas “Tom” Harkin D-RI • *Elizabeth Warren D-MA • *Sheldon Whitehouse D-RI • Barbara Boxer D-CA • John “Jay” Rockefeller D-WV

  15. Consumer Financial Protection Bureau • Sallie Mae • The president of education lender SLM Corp. (aka Sallie Mae) said in July of 2012 that the company is in favor of bankruptcy reform for both federal and private loans, as long as a period of “good-faith payments” is required.

  16. Opponents • Members of Congress who want to privatize education loans (however, this doesn’t get rid of the problem, just makes it harder for 1st generation college applicants and persons without financial means or co-signers to get money) • The Banking Industry (spent $100 million to get the 2005 changes made) • Will increase rates and fees with the added risk of student loan discharge

  17. Stakeholders: • FAFSA Public Lenders (Office of the Department of Education) • Federal and State Governments highly involved in the market • Private Lenders (these rates are often set by LIBOR or PRIME lending rates) • Citizens: families, current students, prospective students, etc. • Universities, Colleges, Educational Institutions • For profit and not for profit • Professors, Administrators, Staff • Textbook publishers, writers, etc.

  18. The Current outstanding student debt is somewhere between $870 Billion and $1 trillion, depending on sample size used • Over the last eight years, aggregate educational debt outstanding has almost tripled, rising to nearly $1 trillion and becoming the largest consumer liability after mortgages. • Because the number of student loan borrowers and the amount each borrower owes have both risen 70 percent since 2004. Source: http://libertystreeteconomics.newyorkfed.org/2013/02/just-released-press-briefing-on-household-debt-and-credit.html

  19. College Tuition has increased 1,120% since 1978Source: http://www.bloomberg.com/news/2012-08-15/cost-of-college-degree-in-u-s-soars-12-fold-chart-of-the-day.html

  20. But the value of a college degree in the labor market has decreasedSource http://www.theatlantic.com/business/archive/2012/11/1-terrifying-graph-about-the-value-of-college-and-1-to-calm-you-down/265705/

  21. The deleterious effects will continue for years. The most affected are those who should be moving into the next phase of of their lives. See http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html

  22. See http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html

  23. However, only a small percentage of debts are so large that bankruptcy would be a better option, limiting the likelihood of abuse. See http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html

  24. In the News: • http://abovethelaw.com/2013/02/if-college-is-the-new-high-school-is-law-school-the-new-liberal-arts-college/ • http://economix.blogs.nytimes.com/2013/03/12/wealth-spending-and-the-economy/ • http://www.nytimes.com/2013/03/08/education/law-schools-look-to-medical-education-model.html?partner=rss&emc=rss&_r=0 • http://www.nytimes.com/2013/02/24/business/high-debt-and-falling-demand-trap-new-veterinarians.html?_r=1&adxnnl=1&pagewanted=all&adxnnlx=1363885665-t274gEmWDAmg9+iKCWPV0Q • http://www.nytimes.com/2012/05/13/business/student-loans-weighing-down-a-generation-with-heavy-debt.html?pagewanted=all • http://abcnews.go.com/Business/bubble-time-cap-college-tuition/story?id=15987539#.UVYZPasjqp0

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