The Consumer Financial Protection Bureau’s move to gut its student loan division is just the latest in a long series of bad government decisions that have compounded the student loan crisis.
Repeatedly, regulators and Congress have closed doors that could have given desperate borrowers relief from overwhelming debts. Student loan servicers that take borrowers’ payments, for example, have been accused of steering low-income customers into higher repayment plans, misallocating payments and failing to tell disabled borrowers, including severely injured veterans, that they had the right to loan forgiveness. Reorganizing the CFPB division that was investigating these abuses sends the clear signal to lenders and loan servicers that they won’t be held accountable for targeting the most vulnerable debtors.
Thirty years ago, struggling borrowers at least had an escape hatch: bankruptcy court. Today, that route has been virtually sealed off because of unnecessarily harsh laws and a bureaucratic insistence that student loan debt should be inescapable.
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Consider the case of Vera Thomas, 62, who was chronically ill when she filed for bankruptcy relief in 2017. The Dallas resident had been unemployed for two years, had no income, subsisted on food stamps and was facing eviction. The bankruptcy court wiped out her credit card debt, medical bills and auto loan but not her student loans.
The federal government, as it frequently does, fought Thomas’ discharge by arguing her situation wasn’t hopeless enough to warrant erasing her $7,800 student loan debt.
Judge Harlin Hale, in denying relief, sympathized with Thomas but indicated his hands were tied. Because of the “incredibly high burden” of proving a hopeless future, Harlin said that in 15 years on the bench he had never discharged a student loan over the objection of the lender.
Sadly, Thomas is not alone. Thousands of Americans in dire financial straits are being chained for life to debt they cannot afford. Something needs to be done to bring a measure of fairness back to this process.
Until 1990, student loans could be discharged in bankruptcy court after the fifth year of repayment. Since then, Congress has repeatedly made erasing education debt more difficult. Debtors must prove that paying the loans poses an “undue hardship” — a term Congress has never defined and which many courts interpret in the narrowest possible terms.
The most desperate could still get relief, however, if not for the Education Department's insistence on fighting bankruptcy discharges regardless of the circumstances. The department’s approach raises the cost of seeking student loan relief for all involved.
“It's just scorched-earth litigation,” says John Rao, staff attorney with the National Consumer Law Center. “People don't even try (to get a student loan discharge) because one, they can't afford the litigation, but two, they're just fearful of having to face that process.”
The government and the Educational Credit Management Corp., the private entity the Education Department often hires to fight bankruptcy cases, typically argue that borrowers should sign up for income-based repayment plans that stretch for 20 to 25 years. They push these plans as an alternative to bankruptcy discharge even when borrowers’ incomes are so low, their payments would be zero.
Any lapses or mistakes can cause people to fall out of the plan, subjecting them to more pointless collection attempts for debts that have ballooned thanks to the unpaid interest that continues to accrue.
This trap may lack steel bars and guards, but it’s a debtor’s prison just the same.
The Education Department recently signaled it may be reconsidering its approach. On Feb. 21, the department published a request for information asking for comments on what factors “should weigh into whether an undue hardship claim should be conceded by the loan holder.”
Instead of battling every discharge, the government should be following the lead of private student loan lenders in weighing the costs and benefits of each case. Private lenders analyze how much they’re likely to get from borrowers vs. the litigation expense. Often, these lenders opt not to fight the discharge.
To fully address the challenges student borrowers face, though, Congress and the CFPB need to adopt a consumer-first approach. To start, the bureau should ensure that its student loan division remains empowered to go after student loan abuse as a deterrent and preventive measure against harm to consumers. If that means reversing its course, then it should do so.
And lawmakers must create a wider path through bankruptcy court that isn’t subject to the unfeeling whims of bureaucrats. At a minimum, Congress should return to the standard of the Bankruptcy Reform Act of 1978 that allowed student loan discharges after five years if borrowers are unable to pay their debts and maintain a minimal standard of living.
People who max out their credit cards can erase that debt in bankruptcy. So, too, can those who don’t have health insurance and then get slammed with medical bills. While most Americans with student loans pay them off in a timely manner, those who can’t afford to do so shouldn’t be shackled with their student loan debt for life.