This is a multi-part post on student loan debt. Part one is about the cause of the increase in student loans. Part two is about the ramifications of the student loan debt. Part three offers some possible solutions to the problem.
For the last 14 years, student loan debt has rocketed. This increase in student loan debt is tied completely to the increase in tuition. Many commentators claim that this increase in tuition is due to the increase in costs of tuition, the required tuition expense, the costs of staffing and all of the other expenses that a college incurs. I fully disagree. As a matter of fact, here is a link to a Daily Kos article that disagrees with my conclusion, but also indicates that these elements cited above have little to do with the increase in the costs of tuition. The Daily Kos cites a study by NYU. Unfortunately, this study was completed in 1998, which was prior to the major changes in the bankruptcy code that protected lenders completely. I believe student loan companies are causing the problems.
I propose that changes from 1979 to 2005 to the bankruptcy code provided motives for easy money lending by student loan companies. This allowed students to obtain more funds for student loans resulting in schools being able to charge more money as students could now afford the new tuition rates with “easy money.” Of course, universities defend this action with increased “renovation” to campuses and everything else that is “necessary to compete” for students. This is essentially an arms race at the expense of students. This “arms race” is the actual cause of the increase in tuition. This is by no means an original thought. It has been discussed by many commentators. See Here and Here.
While this “necessary to compete” claim is probably true, it is because ALL of the universities are benefiting from the income produced by these higher student loans. This requires universities to spend more money to maintain their position as all of the other universities are spending more money to advance themselves. This excessive amount of spending is necessary for ALL of the universities to compete with every other universities.
These changes in the bankruptcy code were a slow chiseling away of the protections afforded to students under the bankruptcy code. Originally, in 1976, when much of the modern bankruptcy code was enacted, student loans were dischargeable five years after they became due, but only if the loans were by the government or a non-profit institution of higher learning. In 1978, this was expanded to allow for hardship discharge. That was the peak of bankruptcy protection offered to students.
Then the chiseling began. In 1979, the loan payment deferment periods were eliminated from counting towards the five year period. A major change in 1984, excepted private loans from discharge by eliminating the words “higher learning” from the 1976 language. In the NYU study previously mentioned, 1986 was when tuition started to increase dramatically. So we see only 2 years after this discharge exception, sophisticated education institutions were already taking advantage of the easier money available to students.
In 1990, the time period exempt from discharge was extended from five years to seven years. In 1993, hardship discharge was essentially eliminated by the inclusion of the income based repayment plans. In 1996, social security payments may be offset to repay student loan obligations. In a huge step, Congress, in its infinite wisdom, decided that in 1998 there was no more ability to discharge student loans at all, but only if there was government backing in some small way for the loans. In 2005, this was extended to prevent discharge from practically every single student loan available.
For more information and more in-depth analysis of this history, I refer you to this excellent timeline here.
As most such paths are paved, I don’t believe that this was done with the intention of fleecing a generation of students. I believe that the federal government was much more altruistic, and had many more good intentions. Namely, I believe, much of this goes back many years to the United States Federal Government’s desire to have a highly educated work force.
In order to obtain this work force, the government determined that it needed to subsidize students, and make attending a university more affordable. In this particular instance, I believe the Congresspeople at the time had lenders whispering in their ear, telling them that private lending could accomplish the goal, but only if bankruptcy discharge was watered down.
This should sound, at least, a little familiar. To me, it sounds just like the creation of the housing bubble. The federal government had an established goal to make housing affordable for all. Please see this excellent article outlining the history of home ownership. This is directly comparable to the programs to make education affordable for all. Both programs were created with the best intentions, but as usual, it is the best intentions that pave the fastest path to hell.
Just as one example of this, in the period between 1985 to 2009, the cost of law school tuition has increased over 900%. See here. Between 2001-2009, overall student loan debt has increased over 600%. See here. This is, coincidentally, roughly the same period that these important changes in the bankruptcy code were made. Notice in particular that the period of time from 2001 to 2009, the rapid increase in student loan debt made possible by the changes in 1998 to the bankruptcy code.
It is clear to me, that not allowing bankruptcy to apply to these student loans allowed massive amounts of tuition increases at universities. This is primarily because student loan companies no longer have any risk in making student loans, as there is no possible way that they will not collect that money from the student. Therefore, easy lending practices by student loan corporations (at exhorbitant interest rates in the face of nearly certain repayment) have increased student tuition which has, in a circular fashion, increased student lending and student debt. This cycle has just continued for nearly 30 years and is now spinning out of control.
Thank you for taking the time to read this article by Tempe based Bankruptcy and Financial attorney Glenn W. Roethler. The views expressed in this article may not represent all of the views at Greeves, Price & Roethler, PLC, but certainly represent some of them.