President Joe Biden’s announcement Wednesday that the federal government would cancel a giant chunk of student loan debt represents the largest break student debtors have had in a long time.
Americans can seek a fresh start after they’re overwhelmed by debts by filing for bankruptcy in a federal court. But borrowers can eliminate debts owed to bank card corporations, health care providers or hotel bondholders more easily than they’ll escape their student loans.
“Congress has been tightening the screws on student loan discharge in bankruptcy for a long time,” said Robert Lawless, a bankruptcy expert on the University of Illinois College of Law.
Meanwhile, student debt has turn into an even bigger and larger mess. Some 45 million borrowers together owe $1.6 trillion, a sum that has steadily risen with the associated fee of upper education. Most of those borrowers weren’t making any progress on their loans before President Donald Trump put a freeze on payments as a part of the federal government’s response to the coronavirus pandemic early in 2020.
Only 37% of student borrowers were reducing their balances at the tip of the 2019, in response to data from the Recent York Federal Reserve. Nearly half had rising balances, while 15% were behind on payments or in default.
Under the coed loan cancellation Biden announced Wednesday, the federal government will cancel as much as $20,000 in debt for current or former student borrowers who also received need-based Pell Grants. As many as 43 million should profit, and 20 million could see their debts completely erased.
Republicans slammed Biden for the proposal, describing it as a handout to Ivy League liberals and a waste of presidency money that hurts the economy.
“President Biden’s inflation is crushing working families, and his answer is to offer away much more government money to elites with higher salaries,” Senate Minority Leader Mitch McConnell (R-Ky.) said Wednesday. “Democrats are actually using working Americans’ money to try to purchase themselves some enthusiasm from their political base.”
Antipathy toward college grads might help explain why federal law makes student debt almost as everlasting as child support obligations or civil liability for injuries attributable to drunk driving.
Starting in 1978, Congress passed a series of laws making it progressively harder for borrowers to discharge student loan debt in bankruptcy. That 12 months, in response to the Congressional Research Service, lawmakers said they feared student borrowers filing for bankruptcy right after graduation “after which having fun with a lifetime of income that education provides, but without the expense of paying back the loans.”
Bankruptcy filers could still discharge student loan debt if repayment presented an “undue hardship” and the loan had come due five years prior to the bankruptcy filing, but Congress removed that option in 1998, essentially making student loan debt everlasting.
Proving undue hardship, meanwhile, is notoriously difficult, with courts requiring debtors to point out continuing their payments would wreck their lives and that there’s “a certainty of hopelessness” they’ll ever find a way to handle the expense.
“This treatment wasn’t the results of any careful evaluation,” said Abby Shafroth, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. “It was just based on this false concept that student loan borrowers were more more likely to abuse the bankruptcy process in comparison with other people.”
In one other notable change, lawmakers made private student loans nondischargeable as a part of a 2005 bill that made the bankruptcy process less favorable to regular people basically.
Then-candidates Elizabeth Warren and Joe Biden take part in a Democratic presidential primary debate at Loyola Marymount University in Los Angeles on Dec. 19, 2020.
FREDERIC J. BROWN via Getty Images
Sen. Elizabeth Warren (D-Mass.) — on the time a Harvard professor and an authority on bankruptcy law — was considered one of the bill’s most visible opponents, arguing that it might harm people impoverished through no fault of their very own by medical expenses. Warren even faced off against then-Sen. Joe Biden (D-Del.) during a Senate hearing, where Biden said it was unfair for bank card corporations and other lenders to be unable to recoup the cash they’d loaned to individuals with high medical bills.
For his entire presidency, Biden hesitated to cancel student debt using executive motion, having previously said Congress should do it amid doubts over his legal authority to go it alone. Warren has been one of the crucial vocal proponents of the concept, pushing Biden to cancel $50,000 of debt per student.
Progressive Democrats and activists outside of governments said this week that Biden wouldn’t have taken motion if it hadn’t been for all of the pressure from the political left.
And Warren said Thursday that the coed debt crisis wouldn’t have gotten so bad if it hadn’t been for such strict bankruptcy rules.
“One in every of the explanations that we have now created this horrible situation with debt is that the bankruptcy laws were modified years ago to make it virtually unattainable to discharge debts in bankruptcy,” Warren told NPR.
Biden’s move isn’t the federal government’s first effort to assist struggling student debtors. Trump paused payments in 2020, and each the Biden and Barack Obama administrations have taken piecemeal steps to ease the coed debt burdens on individuals with low incomes and borrowers who work in public service jobs.
And Lawless said that as overall student debt has continued to balloon, bankruptcy judges have begun to point out a bit more willingness to let student loans go unpaid.
“The conversation around student debt has really shifted over the past couple of years,” said Rachel Gittleman, financial services outreach manager for the Consumer Federation of America.
One other a part of Biden’s announcement Wednesday will set in motion rule changes for borrowers in income-driven repayment plans, reducing the monthly amount owed and stopping balances from growing.
Republicans criticized Biden for doing nothing directly concerning the underlying problem of skyrocketing higher education costs, but quite a lot of advocates said his motion could spur Congress to motion.
“That’s a conversation that hopefully will start start happening, because I believe student debt is just an infinite burden on consumers and might have really lasting impacts on consumers’ ability to realize financial security and construct wealth,” Gittleman said.