In May 2021, about 45 million Americans owed more than $ 1.7 trillion in student loans.1 For people who have arithmetic difficulties, this means that the average borrower has $ 38,000 in student debt. Using more of the power of averages, this means that for every borrower with $ 10,000 student loan debt (still a lot!), There is someone with $ 66,000 student loan debt (ug). And what we’ve read, and what we know from friends, colleagues, and family, shows us that graduate debt of $ 100,000, or double, is becoming more common.
While politicians have talked about various amounts of student loan cancellations, little has come of it. As a result, last month a bipartisan group of lawmakers introduced the NEW START thanks to the Bankruptcy Act (S. 2598) (“Fresh Start Act“).
Today, debtors can only pay off student loans by going bankrupt with the onerous – and some say almost insurmountable – task of proving that student loan repayments constitute “undue hardship.”
Alternatively, if passed, the Fresh Start Act proposes to:
- Make federal student loans eligible for discharge 10 years after the due date of the first loan payment, through a cost-sharing structure (more details below); and
- Retain the existing “undue hardship” option for private student loans or federal student loans due for less than 10 years.
With regard to the cost-sharing structure, higher education institutions (“IHE“) who receive a certain amount of federally backed student loans, would be required to to reimburse a portion of federal student loans released to the taxpayer, ifIHE consistently had high defaults and low repayment rates at the time of the affected student’s attendance.
At first glance, this has some appeal – if a school’s (or “IHE”) graduates disproportionately default on their debts or only repay small amounts, then shouldn’t the school be in bad debt? faulty party? In other words, it creates better incentives (and penalties) for schools – do better to prepare your students for success, or face financial risk. Spend more on training, skills, and student preparation, and less on equipment, overhead, administrators, advertising, etc.
On the other hand, it is simplistic. In application, this provision would likely see the IHE admit fewer students who have to borrow to attend, given the new risk of well-founded repayment. Indeed, the United Negro College Fund (“UNCF“) spoke out strongly against the bill, arguing that it will have a detrimental effect on colleges that historically serve people of color and populations in underserved communities.2 It is very easy to blame a college for a student’s lack of success; but success (or lack of it) is the result of a variety of factors, not just the adequacy of college education.
Here at BCLP GRID (Global Restructuring and Insolvency Developments), we will be keeping an eye on this, and we welcome and admire any effort to tackle student debt, if it is holistic in nature. There must be a way to ensure:
- adequate funding for students to attend college,
- prevent student debt from crushing future hopes and dreams, and
- avoid instantaneous discharge of short-term obligations arising from a lifetime asset (education).
But these efforts must also:
- note and take into account the soaring costs of the college,
- ensure that potential students truly understand all the costs of college and the cheaper college alternatives available to them,
- not create a race to the bottom of colleges that minimize loans and opportunities to poor and underserved communities, and
- recognize that a college degree does not automatically equalize everyone or remove societal barriers to success.
This bill is a start; maybe this is just a flash in the pan, as we have seen with many bankruptcy issues over the years – we will monitor and report.
Federal Reserve Consumer Credit Report – May 2021, Federal Reserve Board, http://www.federalreserve.gov/releases/g19/current.
See UNCF opposes “The FRESH START Through Bankruptcy Act of 2021”, UNCF, https://uncf.org/news/uncf-opposes-the-fresh-start-through-bankruptcy-act-of-2021.
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