- America’s current student loan crisis is real, affecting one in eight adults and accounting for 11% of consumer debt.
- The focus of Washington policymakers on what should be the “right amount” of general forgiveness is wrong.
- Instead, lawmakers should focus on revising existing laws governing “undue hardship” that could empower student debtors and provide them with the relief they need.
- Jonathan Carson and Eric Kurtzman are co-CEOs and co-founders of Stretto, a national provider of bankruptcy technology and services.
- This is an opinion column. The thoughts expressed are those of the author.
What if all the national conversation we’re having on student debt isn’t the right one?
In the ongoing dialogue on student loans, disproportionate attention is being paid to which amount of general remission is the “right amount” to help our country manage this $ 1.71 trillion liability on our collective balance sheet. President Biden launched $ 10,000 per person; Senators Warren and Schumer have set their bid at $ 50,000. The Education Department and Secretary Cardona have been tasked with determining the optimal path forward to help the nearly 45 million Americans in debt.
Unfortunately, this guessing game is misguided. To sustainably fight student debt in the United States, we must move towards a pragmatic dialogue about the realities of our economy, our political environment and, most importantly, our existing laws that we can revise to help Americans facing financial difficulties. . By clarifying the existing bankruptcy code, we could relieve deserving Americans of all or part of their student loan debt without creating unnecessary vague policies.
Understanding the student debt landscape
Student loan debt offsets 11% of total US consumer debt today, impacting one in eight American adults. A estimated at 92% of this obligation, which is equivalent to $ 1.56 trillion, is due to the federal government.
Every dollar the federal government forgives means one less dollar on the country’s balance sheet, which is already heavily burdened by historic debt and more recent COVID-19 spending. This discount would be in contemporary competition with other costly priorities such as infrastructure plans, which will collectively impact the country’s federal balance sheet and increase debt-to-GDP levels.
And the prospect of forgiveness does not contemplate debtor students who have chosen cheaper universities to avoid expensive loans, or who have already paid off their loans and would rightly inquire about disparate treatment. It also does not take into account future generations who would like to be offered the same opportunity when their loans mature.
The affordability of colleges and graduate studies, or rather the lack of them, presents a significant challenge that is at the heart of the student debt situation. General forgiveness does nothing to meet these growing costs. In fact, it does the opposite, removing any incentive or pressure on colleges and universities to optimize their cost structures by socializing that spending across all Americans through increased national debt.
Economic downsides aside, it’s also important to recognize the difficult political environment in Washington. We find ourselves in a highly partisan and charged political environment, where Congress cannot reach consensus and where antagonism and obstruction are rampant. Not a single Republican in the House or Senate voted for pandemic relief earlier this year; instead, we see political lines drawn today on infrastructure spending, voting rights, and Senate obstruction. While student debt should be a non-political issue, the very concept of debt forgiveness (or, rather, the transfer of that expense to the federal government), will be greeted with contempt by many tax conservatives.
President Biden’s omission to write off student debt from his budget further complicates the situation and shows how divided we are over a solution. Our policymakers owe it to the American public, especially those who cannot afford their loans, to be honest and realistic and to pursue resolutions that stand a chance of being passed and implemented.
The existing solution
But there are ways, including established, but underutilized ones. A possible resolution mechanism already exists in the US Bankruptcy Code – it’s a way to manage student debt known as “undue hardship. “
This effort requires a separate filing with the bankruptcy court where a student debtor comes before a judge to demonstrate that he cannot maintain a standard of living for himself or his dependents and that he does not. expect to be able to do so during his repayment period, and has made good faith efforts to repay the loans. Unfortunately, what appears to be a fairly straightforward option is fraught with unnecessary obstacles.
The undue hardship provision is interpreted differently by bankruptcy courts across the country, as the Bankruptcy Code does not provide specific guidance as to what constitutes undue hardship. Generic ambiguity aside, undue hardship remains elusive even for the most deserving student debtors; the standard, in most interpretations, appears to be so onerous that few lawyers even defend their clients in its lawsuit. The provision benefits few, if any, of those who experience financial difficulty with their student loan debt simply because it is too much to sue.
Where we can affect change in a real, immediate and impactful way is to revise this provision of the Bankruptcy Code with universal direction and applicability so that it achieves what Congress asked when first wrote it in law. If the federal government provided more clarity in this regard, we might see an easier and more efficient way to deal with the severe cases where Americans are truly crippled with student debt.
There is a recent and successful parallel. Congress has already successfully implemented revisions to the Bankruptcy Code by extend the ceiling of Subchapter V bankruptcies to help small business owners during the pandemic. A similar approach could be applied to the undue hardship provision, which would provide lasting support only for the most serious cases without increasing the national deficit.
If the Biden administration and policymakers are serious about student debt, this is a way forward that would relieve student debtors today and for generations to come, while protecting the federal balance sheet by limiting debt. discounts to the extent necessary to enable debtors to maintain a certain standard of living, rather than providing a blanket discharge without context for decisions or personal needs. Changing the bankruptcy code is an effective, accessible, fair and pragmatic political solution.