Student loan is one topic that I get impassioned about because a) I have student loans and b) because it affects so many people. I recently submitted my 2 cents to PBS Newshour where they requested input for “Has student loan debt affected your life?” When I saw this, I wanted to scream and say YES! Student loan has and continues to impact me, my husband and millions of young graduates.
I have had lengthy discussions with my attorney colleagues about student loans and we all agree that it is a huge problem. Remember the mortgage boom where they were giving out mortgages to anyone with a pulse? The same problem is looming for student loans except instead of a mortgage on your house, it will be a mortgage on young people’s brains and livelihood.
The problem with student loans
First, let me start off by saying that I am not unilaterally against student loans. It certainly has its place and had it not been for student loans, I could not have gone to law school.
The problem as I see it are twofold. First, because of a student’s ability to borrow almost unlimited amounts of money, tuition costs have skyrocketed. As an example, my own law school, the University at Buffalo was about $10,000 per year in 2000. Now, it’s $19,000.
The second problem is that there is absolutely no effort to teach our students about debt and what it means. In fact, we make no effort to educate students on financial literacy. When I was 17, I don’t think I could have fathomed or fully appreciated what a $1500 a month student loan payment looks or fees like. In my mind, I just thought, ‘well, once I get this degree, I’ll be able to land a job making $100,000 so it shouldn’t be any problem to repay $1,500 a month.’ Oh, how wrong I was. Of course, anyone that is earning $100,000 will tell you, while it’s not a poor living by any stretch, it’ probably only affords a modest life, especially in a place like San Francisco.
Lastly, unlike almost any other form of debt, there is no exit from student loans. Bankruptcy law has set an almost impossibly difficult standard to discharge student loans. Basically, you have to prove that you’ll never be able to work another day in your life and it requires you to live in poverty.
Student loan crisis and the mortgage crisis
All the abuses we saw with the mortgage crisis exist in student loans. Interest rates are at a record low, yet no one but the very wealthy, and those with impeccable credit can access the funds.
Additionally, no one is refinancing student loans. As an example, one of our student loans is fixed at 8.93%. An outrageously high interest rate.
If I could have the interest rate adjusted just 1%, that would reduce it by$81/mo. Put differently, I can shave 6 years off the loan. In the 7 years since graduation, we have paid almost as much in interest as the original principal amount.
Ideas for fixing student loans
As a bankruptcy lawyer that is personally struggling with her own student loan debt, here is what I would propose to fix our current student loan crisis.
- Education. How about a half day class (or more) on basic financial management skills and teaching kids what a realistic income would be for various degrees?
- Set a maximum loan limit private student loans. Right now, Federal loans are capped at $57,500 for undergrad and $138,500 for graduate school. A similar cap should be set for private loans.
- Make loans contingent on good grades. Set a minimum GPA requirement for students to be able to get loans.
- Student loan forgiveness program. There is a pending legislation, HR 4170 which would forgive student loans if the borrower commits 10% of his disposable monthly income for 10 years. Get the full details here.
- Give student loan debt priority status in bankruptcy. Even though student loan is non-dischargeable in bankruptcy, it is given the same status as credit cards. This does not make any sense and is inherently unfair. Frequently, borrowers will end up owing more on student loan after Chapter 13 bankruptcy because interests and penalties continue to compound.
- Change the criteria for discharging student loans in bankruptcy. This can be achieved in either Chapter 7 or Chapter 13 bankruptcy. Lower the bar for discharging student loans and/or extend the current Chapter 13 to 10 years and have the balance discharged at the conclusion of Chapter 13.
