Our Nation’s Founders called for a uniform bankruptcy system ahead of the power to declare war, coin currency, and raise an army when they gave Congress its powers in Article I, Section 8 of the U.S. Constitution. Thomas Jefferson, George Washington, and others were themselves abused at the hands of British banks and merchants, so clearly these men knew firsthand the importance of bankruptcy rights to a fair, free society. This right, however, was removed uniquely from student loans, and now we are seeing the results.
Since the exception to bankruptcy discharge for student loans was made permanent in 1998, the nation’s student debt tab has exploded from about $100 Billion to over $1.5 Trillion. Student loans now exceed all other forms of non-housing consumer debt, and interest alone on the debt exceeds $90 Billion per year.
In January, the Brookings Institution reported that the default rate for 2004 undergraduate students is an astonishing 40%. While many defenders of the lending system attempted to blame this on the horrible for-profit college sector, it turns out that subtracting them entirely from the data still leaves a default rate for the “good” schools (ie the non-profit colleges) of 34.5%.
What is worse: 2004 students were only borrowing about $13,000, on average compared to about $39,000 today.
So, the student loan system is, well, failing.
My best estimate is that for more recent students, the default rate has got to be upwards of 60%, perhaps far higher. This is about triple the default rate for sub-prime home mortgage loans. This is a default rate that forces one to question the legitimacy of the lending system itself.
What is worst: The Department of Education, which profits some $50 Billion per year on the system and even makes a profit on defaults, fights tooth-and-nail behind the scenes to keep bankruptcy gone from student loans. It has collection powers that would make a “mobster envious”, and the real, human damage that this is causing is far beyond measure. Disturbingly, it is not an understatement to say that the Department of Education has become the largest predatory lender the world has ever known. This is precisely what the Founders wished to avoid. What wise men they were!
Even Wall Street is beginning to take notice. The Chairman of the Federal Reserve, Jerome Powell, recently remarked that he was “at a loss” to explain why student loans are treated differently from all other loans in bankruptcy proceedings. Last year, Jamie Dimon and William Dudley both pointed out that student debt was becoming a serious drag on the economy.
Books will certainly be written about the Congressional neglect of this issue, about the corruption in Washington that allowed this to happen, about how the Department of Education was captured by the banks. But that won’t help us in the current time.
What is needed, right now, is for Congress to wake up, and pass H.R. 2366, a bipartisan Bill with 31 cosponsors that will make student loans the same as all other loans in bankruptcy proceedings. If that does not happen this session, the entire lending system will surely vanish into a mist of illegitimacy.
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